Interest Only - If you take out an "Interest Only" loan than your monthly payments do not include any repayment of principal. This reduces your payments but does not help you build up any equity in your home since you will still owe the entire principal amount of the loan at maturity or when you sell the home or refinance it. Borrowers who feel they will only be in the home a shorter time and those that feel they can refinance the loan later when interest rates go down or when they start earning more income, use the interest only loans to keep their monthly payments lower.
    
"Private Mortgage Insurance" ("PMI") - Many lenders will require you to take out "Private Mortgage Insurance" know as "PMI" . This insurance pays off the lender if you die before the loan is repaid. Some lenders will insist on PMI if they feel your may be a little more credit risk. You may not be able to avoid this additional monthly cost, or, if you feel that you need this insurance, you may find it useful if you do not have life insurance or it is not enough to pay off the loan. The annual premium varies and can add $25 to $100 to your monthly payment.
    
"Escrow" - Since it is your responsibilitiy to take out homeowners insurance on your property and flood insurnace where required as well as pay the annual real estate taxes, many lenders require you to pay 1/12th of the annual cost of each into an "escrow" account at the lender. This assures the lender that the insurance premiums are kept up to date and that the real estate taxes are paid on time...since the funds will be accumulating in your "escrow" account and paid out by the lender when the bills are due. The lender will have you list him as the beneficiary of the insurance and the bills be sent to him. And the governmental agency that collects the real estate tax on your property will also send the statements to your lender for payment. In some cases, if the lender is conveinced you are credit worthly enough, he will forgo the "escrow" account and let you take care of making the insurance and real estate taxes on your own.
     
    

    
A. Normal Principal & Interest Mortgage with a $100,000 Amount - 6% Fixed Interest Rate for 30 Years
         

    
B. Same $100,000 as above with the same 6% interest rate for 30 years, but add P&I and Escrows
         
For our example we will assume the "PMI" annual premium is $360 and the annual Homeowners insurance policy is $600 and the annual Real Estate Tax is $1,200. The annual "PMI" and Homeowners Insurance premiums as well as the Real Estate Tax is divided by 12 and then added to the regulare monthly payments.
    

    
C. $500,000 with the same 6% interest rate for 30 years, but add P&I and Escrow.
         
For our example we will assume the "PMI" annual premium is $650 and the annual Homeowners insurance policy is $2,000 and the annual Real Estate Tax is $5,000. The annual "PMI" and Homeowners Insurance premiums as well as the Real Estate Tax is divided by 12 and then added to the regulare monthly payments.
    

    
D. $1,000,000 with the same 6% interest rate for 30 years, but add P&I and Escrow
         
For our example we will assume the "PMI" annual premium is $1,500 and the annual Homeowners insurance policy is $4,000 and the annual Real Estate Tax is $10,000. The annual "PMI" and Homeowners Insurance premiums as well as the Real Estate Tax is divided by 12 and then added to the regulare monthly payments.