Understanding Your Mortgage Payment
A mortgage payment consists of more than just paying back your loan. Most homeowners pay a combined amount that includes principal, interest, taxes, and insurance — commonly called PITI. Understanding each component helps you budget accurately and make smarter decisions.
The Four Parts of PITI
Principal
The portion of your payment that reduces your loan balance. In early years, this is a small part of your payment, but it grows over time as your balance decreases.
Interest
The cost of borrowing money. This is calculated on your remaining balance, so it's highest at the start of your loan and decreases over time.
Taxes
Property taxes are typically collected monthly by your lender and held in an escrow account, then paid to your local government annually or semi-annually.
Insurance
Homeowner's insurance protects your property and is usually required by lenders. Like taxes, it's often escrowed and paid on your behalf.
The Mortgage Formula
M = P × [r(1+r)ⁿ] / [(1+r)ⁿ - 1]
Monthly principal and interest payment calculation
For a $320,000 loan at 6.5% for 30 years, your monthly P&I payment would be $2,022.02.
15-Year vs. 30-Year Mortgages
| Factor | 15-Year | 30-Year |
|---|---|---|
| Monthly Payment | Higher | Lower |
| Total Interest | Much Lower | Higher |
| Build Equity | Faster | Slower |
| Flexibility | Less | More |
Example with $320,000 at 6.5%:
- 30-year: $2,022/month, $408,000 total interest
- 15-year: $2,791/month, $182,400 total interest
Interest Savings
Understanding PMI
Private Mortgage Insurance (PMI) is required when your down payment is less than 20%. It protects the lender (not you) if you default.
| Typical PMI Cost | Example |
|---|---|
| 0.5% to 1.5% of loan/year | $320,000 loan at 1% = $3,200/year |
How to Remove PMI
- Reach 20% equity through regular payments
- Home appreciates to give you 20% equity
- Refinance once you have 20% equity
- Request removal at 80% LTV (most lenders)
Interest Rate Impact
A small change in interest rate has a big impact over 30 years:
| Rate | Monthly P&I | Total Interest | Difference |
|---|---|---|---|
| 5.5% | $1,817 | $334,000 | — |
| 6.0% | $1,919 | $370,800 | +$36,800 |
| 6.5% | $2,022 | $408,000 | +$74,000 |
| 7.0% | $2,129 | $446,400 | +$112,400 |
Based on $320,000 loan, 30 years
Rate Matters
Extra Payments: The Power Move
Making extra payments toward principal can dramatically reduce your total interest and loan term.
Strategies
- One extra payment per year → Pay off in ~25 years instead of 30
- Bi-weekly payments → 26 half-payments = 13 full payments/year
- Round up → Pay $2,100 instead of $2,022
- Lump sum → Apply bonuses or tax refunds to principal
Extra Payment Example
Frequently Asked Questions
Q: What credit score do I need for a mortgage?
A: Conventional loans typically require 620+. FHA allows 580+ with 3.5% down. The best rates require 740+.
Q: How much house can I afford?
A: Your monthly payment (PITI) shouldn't exceed 28% of gross monthly income. Total debt payments shouldn't exceed 36%.
Q: Should I pay points to lower my rate?
A: If you'll keep the loan long enough to break even. One point (1% of loan) typically lowers rate by 0.25%.
Q: What's the difference between APR and interest rate?
A: Interest rate is the cost of borrowing. APR includes interest plus fees, giving you the true cost of the loan.
Q: Can I pay off my mortgage early?
A: Most mortgages allow prepayment without penalty. Check your loan documents to confirm.
Next Steps
- Get pre-approved — Know your budget before shopping
- Compare lenders — Get at least 3 quotes
- Understand all costs — Request Loan Estimates
- Plan for the future — Consider career stability, family plans
- Build an emergency fund — 3-6 months of payments
This calculator provides estimates for educational purposes. Actual mortgage terms depend on creditworthiness, lender policies, and market conditions. Consult with a licensed mortgage professional for personalized advice.