How Mortgages Work

The five parts of a monthly payment (PITI + more)

Most monthly mortgage payments are made up of several pieces, often abbreviated PITI:

• Principal — the portion that pays down your loan balance.
• Interest — the cost of borrowing, charged on the remaining balance.
• Taxes — property taxes, usually collected monthly into an escrow account.
• Insurance — homeowners insurance, and sometimes mortgage insurance (PMI/MIP).
• HOA dues — if your property belongs to a homeowners association.

Fixed vs. adjustable rates

A fixed-rate mortgage keeps the same interest rate for the life of the loan — predictable and popular. An adjustable-rate mortgage (ARM) starts with a lower fixed period (e.g., 5 years) and then adjusts periodically based on market indexes, which can rise or fall.

What is amortization?

Amortization is the schedule by which your loan is paid off. Early on, most of each payment goes toward interest; over time, more goes toward principal. A 15-year loan builds equity faster and costs far less interest overall than a 30-year loan, but has a higher monthly payment.

How lenders decide what you qualify for

Lenders look at your credit score, debt-to-income ratio (DTI), down payment, employment history, and the property itself. Improving your credit and lowering your DTI before applying can meaningfully improve the terms you're offered.