What you're actually paying for: PITI
Your monthly mortgage payment is four things stacked together: Principal, Interest, Taxes, and Insurance. Not all four go to the bank — only principal and interest do.
Principal
The actual loan balance. Each month, a portion of your payment reduces what you owe.
Interest
The lender's fee for the borrowed money. Calculated as (remaining balance × rate) / 12. In year one, ~80% of your payment is interest. By year 25, ~80% is principal. This is why early extra principal payments are so powerful.
Taxes
The lender collects 1/12 of your annual property tax bill each month and holds it in an escrow account, then pays the county when the bill comes due. In San Diego, property tax is ~1.05–1.25% of purchase price annually (Prop 13 base + voter-approved bonds + Mello-Roos in newer communities). See our San Diego property tax guide.
Insurance
Homeowners insurance, paid annually but escrowed monthly. In San Diego, $1,200/yr coastal-urban to $6,000+ in fire-exposed inland areas.
PMI — the fifth piece, sometimes
If you put less than 20% down on a conventional loan, you'll also pay private mortgage insurance until your loan-to-value ratio hits 78–80%. Typical: 0.3–1.2% of loan/year. PMI protects the lender; it does nothing for you. FHA has its own version called MIP.
Rate vs. APR
Interest rate = the rate on your note. Drives your payment.
APR = interest rate + amortized closing costs, expressed annually. Always 0.10–0.25% higher than rate.
When comparing two lender quotes, look at APR — it's the apples-to-apples number. A "3.5%" rate with $8,000 of fees is more expensive than a "3.625%" rate with $1,500 of fees.
Amortization — why early payments are mostly interest
Your monthly payment stays flat over the life of the loan, but the split between principal and interest shifts every month. Example, $700K loan at 7%, 30-year:
| Year | Monthly P&I | To Interest | To Principal | Balance |
|---|---|---|---|---|
| 1 | $4,657 | $4,083 | $574 | $693,164 |
| 5 | $4,657 | $3,917 | $740 | $667,212 |
| 15 | $4,657 | $3,196 | $1,461 | $546,008 |
| 25 | $4,657 | $1,536 | $3,121 | $262,415 |
| 30 | $4,657 | $27 | $4,630 | $0 |
Fixed vs. adjustable
- Fixed-rate. Same rate for the entire term (usually 30 or 15 years). Predictable.
- Adjustable-rate (ARM). Fixed for an initial period (3, 5, 7, or 10 years), then adjusts annually based on a market index plus a margin. Lower starting rate; risk of higher payments later.
Discount points
Pay 1% of the loan upfront to lower your rate by ~0.25%. Pays off if you keep the loan past the breakeven point (usually 5–7 years). Most San Diego buyers don't keep a loan that long, so points often aren't worth it. Run the math.
Escrow — two different things
Confusingly, "escrow" means two things:
- Escrow (closing). The neutral third party holding your earnest money and coordinating closing.
- Escrow (impound) account. The lender's monthly tax + insurance holding account.
Context tells you which. In California, both are common in the same transaction.
What changes when you sign
You sign a Promissory Note (the IOU) and a Deed of Trust (the lien against your property — California uses these instead of mortgages). The deed of trust is recorded with the county. If you stop paying, the lender can foreclose non-judicially in California — typically 4–6 months from default.