When people begin exploring mortgages, they often encounter terms that blend together: principal, interest, term, escrow, and sometimes private mortgage insurance (PMI). While these concepts can seem intimidating, each plays a specific role in the monthly payment. The principal is the portion of the loan you still owe; interest is the cost of borrowing; and the term is the length of time you agree to pay the loan back, such as 15 or 30 years. A shorter term generally offers a lower interest rate but a higher monthly payment, while a longer term spreads costs out but increases total interest paid.

Many lenders collect property taxes and homeowner's insurance on your behalf through escrow, bundling these charges into a predictable monthly amount. When buyers put down less than a certain percentage of the purchase price, PMI may be added as well. PMI doesn’t protect the homeowner—it protects the lender from default—and it typically falls off after enough equity is built. Buyers often weigh these moving parts when deciding how much to put down or whether to choose a shorter or longer term. This question tests familiarity with a common concept that shows up early in almost every mortgage conversation.