You know your mortgage payment. You’ve been making it every month. But do you actually know what’s inside that number?

Most homeowners don’t. They see one amount leave their account and don’t think much beyond that. But your monthly mortgage payment is made up of several different pieces and understanding what each one is and where it goes can tell you a lot about the financial reality of owning your home.

Let’s break it down.

Principal

This is the part of your payment that actually goes toward paying off what you borrowed. In the early years of your mortgage this number is smaller than you might expect. That’s because of how amortization works. Your lender front loads the interest, which means in the beginning the majority of your payment is going toward interest and only a small portion is chipping away at the actual loan balance.

Over time that flips. As your balance gets smaller, more of each payment goes toward principal. But in those first few years, don’t be surprised if you look at your mortgage statement and feel like you’re barely making a dent.

Interest

This is what your lender charges you for borrowing the money. It’s calculated as a percentage of your remaining loan balance which is why your interest payment is highest at the beginning and decreases over time as your balance goes down.

Your interest rate was locked in when you closed, either as a fixed rate that never changes or an adjustable rate that can move after an initial period. If you have a fixed rate mortgage you already know exactly what this number looks like for the life of the loan.

Property Taxes

If you have an escrow account, and most homeowners with conventional loans do, a portion of your monthly payment is being set aside to cover your property taxes. Your lender collects this money, holds it in escrow, and pays your tax bill when it comes due.

This number can change year over year as your assessed value changes, which is why your monthly payment can go up even when your interest rate stays the same. If your taxes went up this year, that’s likely showing up in your mortgage payment.

Homeowners Insurance

Similar to property taxes, if you have an escrow account your homeowners insurance premium is also being collected monthly and paid by your lender on your behalf. This covers you in the event of damage, theft, or liability claims on your property.

Like taxes, this number can increase at renewal and those increases get passed through to your monthly payment.

Private Mortgage Insurance

If you put down less than twenty percent when you bought your home, you’re likely paying PMI. This is insurance that protects your lender, not you, in case you default on the loan. It typically runs between 0.5% and 1.5% of your loan amount annually and gets added to your monthly payment.

The good news is PMI doesn’t last forever. Once you’ve built enough equity in your home, generally when your loan balance drops to 80% of the home’s original value, you can request to have it removed. If your home has appreciated significantly, you may be able to get there faster than you think through a new appraisal. It’s worth looking into if you’ve been in your home for a few years.

As the Consumer Financial Protection Bureau outlines, lenders are required to automatically cancel PMI once your balance reaches 78% of the original purchase price, but you can request removal at 80%. Don’t wait for your lender to bring it up.

So where does your money actually go?

Here’s a simple way to think about it. Of your total monthly payment, principal and interest go to your lender. Taxes and insurance go into escrow and get paid to your county and your insurance provider. PMI, if you’re paying it, goes to a private insurance company.

Only the principal portion is building your equity. Everything else is a cost of owning.

That’s not a reason to feel bad about your mortgage. It’s just a reason to understand it. Knowing exactly where your money is going puts you in a better position to make smart decisions about your home, whether that’s deciding when to refinance, when to make extra principal payments, or when it makes sense to sell.

If you’re an Atlanta homeowner with questions about your home’s value or where you stand equity wise, we’re always happy to talk through it.

The bottom line

Your mortgage payment is doing a lot of different things at once. The more you understand about where each dollar is going, the better equipped you are to make decisions that actually build your financial future.