Real Estate Dictionary
Abbreviation for principal, interest, taxes, and insurance, all of which are lumped together in your monthly mortgage payment.
Principal: This is the portion of the monthly payment that goes towards repaying the original amount borrowed, known as the principal balance. Over time, as you make mortgage payments, the principal balance decreases.
Interest: This is the cost of borrowing money from the lender. It is calculated based on the interest rate applied to the remaining principal balance. Initially, a larger portion of the monthly payment goes towards interest, but over time, as the principal balance decreases, the portion allocated to interest also decreases.
Taxes: This refers to property taxes levied by local government authorities. Property taxes are typically based on the assessed value of the property and are used to fund public services such as schools, roads, and emergency services. Lenders often collect a portion of the estimated annual property taxes along with the mortgage payment and hold it in an escrow account to ensure that the taxes are paid when due.
Insurance: This refers to homeowner's insurance, which protects the property against damage or loss. Lenders require borrowers to have homeowner's insurance coverage to protect their investments. Similar to property taxes, the estimated annual insurance premium is often collected along with the mortgage payment and held in an escrow account to ensure timely payment.