What goes into a mortgage payment
Lenders often call the monthly payment PITI: principal, interest, taxes and insurance. Principal is the part that pays down the loan. Interest is what the lender charges for the money. Property tax and homeowners insurance are usually collected with the payment and held in an escrow account, then paid on your behalf when the bills come due.
Two more costs can sit on top. Private mortgage insurance (PMI) is usually required on a conventional loan when you put down less than 20%. HOA dues are paid to a homeowners association, often directly rather than through the lender, but they still come out of your monthly budget, so this calculator includes them.
The mortgage payment formula
Principal and interest on a fixed-rate loan come from the standard amortization formula:
- M is the monthly principal and interest payment.
- P is the loan amount: the home price minus your down payment.
- r is the monthly interest rate: the annual rate divided by 12, as a decimal. 6.5% becomes 0.065 ÷ 12 = 0.0054167.
- n is the number of monthly payments: 360 for a 30-year loan.
The payment stays the same every month, but the split changes. Early payments are mostly interest because the balance is large. Each month a little more goes to principal, which is why the table above shows the balance falling slowly at first and faster near the end.
Worked example
A $400,000 home with 20% down leaves a $320,000 loan. At 6.5% for 30 years, principal and interest come to $2,022.62 a month. Add $4,800 a year of property tax ($400 a month) and $1,500 a year of insurance ($125 a month) and the full payment is about $2,547.62.
Over 30 years you would pay roughly $408,142.36 in interest. The same loan over 15 years, even at the same rate, costs $2,787.54 a month but only about $181,757.84 in interest.
Ways to lower your monthly payment
- Put more down. A smaller loan lowers principal and interest, and reaching 20% usually removes PMI.
- Compare rates from several lenders. Even a quarter of a point changes the payment by tens of dollars a month on a typical loan.
- Weigh the term. A 30-year loan has a lower payment; a 15-year loan saves a large amount of interest.
- Shop for insurance and check your tax assessment. Both are part of the payment and both can be reduced.
- Consider discount points. Paying points at closing lowers the rate. It pays off only if you keep the loan long enough.