As with any loan, part of your monthly mortgage payment will include principal and interest. There are also property taxes and insurance to consider. For most borrowers, your monthly payment will include all four items, together known as PITI.

The following paragraphs briefly explain PITI, as well as some other terms you should be familiar with.

Principal. The principal is the amount of money that you borrowed to buy your house, not the selling price of the house. If you provided a downpayment (a lump sum of cash to reduce your loan amount), this amount is subtracted from the total house price to determine the amount of principal you will be financing.

Interest. Interest is what the lender charges you to borrow the principal. As with any loan, the interest is expressed as a percentage called the interest rate. This interest is calculated every month as a part of your monthly mortgage payment.

Property taxes. The taxes are property taxes your community levies based on a percentage of the value of your home. The tax is generally used to help finance the cost of running your community, say to build schools, roads, infrastructure and other needs. You must pay property taxes even if you don't need an escrow account and even after your mortgage is paid off.

Homeowner's insurance. Lenders won't let you close the deal on your home purchase if you don't have home insurance, which covers your home and your personal property against losses from fire, theft, bad weather and other causes. Even if you pay cash for your home, you should buy home insurance unless you can afford to repair or rebuild your home if it's damaged or destroyed.

Flood insurance. If your home is in a federally designated high flood risk zone within a flood plain and you are signing for a federally insured loan, federal law mandates that you must buy flood insurance. If you are not in a high flood risk zone, you still may buy the coverage.

Private mortgage insurance. If your primary mortgage loan is for an amount greater than 80% of your house sale price, most lenders will make you pay for private mortgage insurance (PMI). This insurance coverage doesn't protect you, it protects the lender in case you don't pay the mortgage. If you are able to make a downpayment equal to 20% of the house sale price, or arrange alternative financing for that 20%, then your lender will not charge you for PMI. If you are a military veteran and obtaining a loan from the Veteran's Administration, then you are not required to put down any money on your loan and you will not be required to pay for PMI since the Government is guaranteeing your loan.

Amortization. Principal and interest comprise the majority of your monthly payments. During the early years of a loan, the payment is mostly interest. During the latter years of a loan, the payments are mostly principal. This is a process called amortization which reduces your debt over a specific period of time.

Escrow account. In addition to your principal and interest, your mortgage payment could include money that's deposited in an escrow account to pay taxes and insurance. Generally, if your downpayment is less than 20% of your sale price, your lender considers your loan riskier than those with larger downpayments. To offset this risk, the lender sets up an escrow account to collect for the taxes and insurance, which are then included in your monthly mortgage payment. The lender also pays these bills from your escrow account when they are due, so you don't have to worry about saving enough to pay them yourself.

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