For most borrowers, each monthly mortgage payment consists of PITI, an acronym that stands for the following:

• Principal, which is the total outstanding balance of the loan;
• Interest, which is the cost of borrowing money;
• Taxes, which are levied on the property by the local government; and
• Insurance, which protects the owner and the lender from losses caused by fire and natural hazards

You should ask your mortgage lender whether they will require you to establish an escrow account for taxes and insurance. If so, your monthly payment will include amounts to pay the taxes and insurance when they become due. If your lender will not require you to establish an escrow account, you will be required to pay the taxes and insurance directly, and usually in a lump sum, when due. Since these expenses are a necessary cost of homeownership, you should determine what your monthly payment would be if taxes and insurance were included to ensure that you can afford these additional costs. If you fail to make the payments, the lender will pay the taxes for you and obtain homeowners insurance on your behalf. The insurance the lender purchases may be more expensive than insurance you obtained yourself. In addition, your lender may then require you to establish an escrow account and your monthly payments will be increased to pay for the taxes and insurance.

It is very important for you to determine whether you can make the mortgage payments of principal and interest and pay for taxes and insurance before you obtain a mortgage loan.