A mortgage is a long term loan that a borrower obtains from a bank, independent mortgage broker, or even the property seller. The house and the land it's on serve as collateral for the loan. The borrower signs papers at closing that give the lender a lien against the property. If that borrower doesn't make payments as promised, the lender can take the home back through foreclosure. Because mortgages are usually for large amounts, borrowers pay them off over long periods, usually between 15 to 30 years. In the beginning, most of the monthly payment just goes towards interest, but later on, more and more of the total monthly payment goes towards paying off the principal balance. An escrow account is an account that the borrower contributes money to each month to cover property taxes and insurance on a property when they come due. When an escrow account is established, a monthly mortgage payment is called a PITI payment. Principal: the actual loan balance Interest: the interest owed on that balance Real Estate Taxes: taxes assessed by different government entities Property Insurance: insurance coverage against harm to the home Depending on the type of mortgage a borrower has, the monthly payment may also include an additional fee for private mortgage insurance (PMI) or government backed mortgage insurance premiums. If a borrower is putting at least 20% down, the borrower can choose not to set up an escrow account for taxes and insurance and instead just pay each bill in a lump sum when they come due. Certain lender also offer to "waive escrow" for an upfront fee even without 20% down. Because mortgages are based on a repayment formula called amortization, the breakdown of each payment changes over time. This basically means the lender spreads the interest you owe on the mortgage over hundreds of payments so that the monthly payments are as affordable as possible. Below is an example of how principal and interest change over the life of a loan Payment number Principal balance Payment amount Interest paid Principal applied New balance 1 225,000.00 $1,348.99 $1,125.00 $223.99 $224,776.01 60 $209,672.93 $1,348.99 $1,048.36 $300.63 $209,372.20 120 $188,698.38 $1,348.99 $943.49 $405.50 $188,292.88 240 $122,245.83 $1,348.99 $611.23 $737.76 $121,508.07 359 $2,677.88 $1,348.99 $13.39 $1,335.60 $1,342.28 On a 30 year $225,000 mortgage with a fixed interest rate of 6%, a homeowner who keeps the loan for the full term will pay $260,635.93 in interest. The lender can't possibly expect a borrower to pay all that interest in just a couple of years so the interest is spread over the full 30 year term. That keeps the monthly payment at $1,348.99. However, the only way to keep the payments stable is to have the majority of each month's payment go toward interest during the early years of the loan. Of the first month's payment, for instance, only $223.99 goes toward principal. The other $1,125.00 goes toward interest. That ratio gradually improves over time, and by the second-to-last payment, $1,335.60 of the borrower's payment will apply to principal while just $13.39 will go toward interest.