There are several components to a mortgage and four of them specifically play a crucial role in the calculations of a mortgage payment. These four items include: principal, interest, taxes and insurance. Our experienced St. Louis mortgage lenders feel that you – as a current or future homeowner – should know the breakdown of a mortgage’s cost structure.



A portion of a mortgage payment is dedicated to paying the principal. Loans are typically structured so that the amount of principal returned to the borrower is initially small, but increases with each monthly payment. The payments in the final years are primarily principal repayment, while the earlier years of payment are focused on interest.



The interest payment is payment to the lender for allowing a homeowner to borrow money. The interest rate is directly related to the size of the mortgage – the higher the mortgage, the higher the interest rate. Therefore, higher interest rates reduce the amount of money a homebuyer can borrow and vice versa.



Real estate taxes are determined by governmental agencies and eventually are used to fund a host of public services (school construction, public safety, etc.). The government calculates these taxes annually and they are paid on a monthly basis by the homeowner. To break it down into simpler terms, the amount of money due in taxes is divided by the total number of monthly mortgage payments in a given year. Your St. Louis mortgage lender will collect the payments and hold them in escrow until the taxes are due.



A mortgage generally includes two different types of insurance coverage. Similar to taxes, insurance payments are due with each mortgage payment and also held in escrow until the bill is due. These insurance types are identified as property insurance and private mortgage insurance (PMI). Property insurance protects the home and its contents from fire, theft and other disasters. PMI is mandatory for homeowners who purchase a home with a down payment less than 20% of the home’s price. This ensures that the lender is protected in the event that the borrower is unable to repay the loan. Once the borrower has at least 20% equity in the home, PMI can be dropped.


These four components, packaged together into your mortgage, are not necessarily fitting for every homebuyer. Therefore, some homebuyers opt for a mortgage that excludes taxes and insurance and therefore paid for separately. At USA Mortgage, we strive to help you step into a home that is supported by a cost structure that fits your budget and lifestyle. For more information on where your dollars go in the home buying process, contact USA Mortgage – a St. Louis mortgage company of choice.