If you’re going to buy a house or already have one, you should understand what makes up your mortgage payment. To your mortgage lender, the most important part of the mortgage payment is the interest. This is where they make their money. While your mortgage payment never varies if you have a fixed interest rate, the amount of your mortgage payment going to interest is very high for the first few years and gradually lessens over the life of the loan. In the beginning, less than a fifth of your payment may actually go towards the principal, the cost of your home.

Be aware of the new Interest-Only mortgages, where you have a lower house payment for several years, but you are not paying anything on the principal. Depending upon your state and the terms of your loan, you may have a special insurance that is part of your mortgage payment, called a PMI in some places and an MPI in others. This insurance is a premium you pay to help cover costs in case you default on a loan. Your mortgage payment may include escrow accounts, where the lender collects for property taxes or homeowners insurance every month, then pays these bills when they come due. By federal law, a lender is required to explain where every cent of your mortgage payment is going.