What a mortgage payment is actually made of
Most people quote a mortgage payment as a single number, but a lender's monthly draft is assembled from up to five separate charges. Lenders call the bundle PITI — principal, interest, taxes and insurance — and it matters enormously that you know which parts you are looking at, because only two of them shrink your debt.
Principal is the portion that reduces what you owe. Interest is the lender's charge for the money, calculated on whatever balance remains this month. Together these two make the amount fixed by your note; they never change on a fixed-rate loan. Taxes and insurance are collected into an escrow account and paid out on your behalf when the bills fall due — and these do change, usually upward, every year. On top of that sit two optional items: HOA or condo dues, and private mortgage insurance (PMI) if you put down less than 20%.
The gap between the two figures is not small. On a $360,000 loan at 6.5% with typical escrow, principal and interest come to about $2,275 a month, while the full payment is closer to $3,040 — a difference of one-third. A buyer who budgets from the principal-and-interest figure alone is short roughly $9,200 a year.
How the amortised payment formula works
The payment on a fixed-rate mortgage comes from the annuity formula. It answers a precise question: what constant monthly amount, paid n times, exactly retires a balance of P if interest accrues at rate r each month?
The shape of the formula follows from that question. The term is the present value of $1 received n months from now. Subtracting it from 1 and dividing gives the present-value factor for a stream of n equal payments. Multiply your principal by the monthly rate and divide by that factor, and you have the payment.
Two conversions trip people up. First, the rate must be periodic, not annual: a 6.5% mortgage uses r = 0.065 ÷ 12 = 0.00541667, not 0.065. Second, use the note rate, not the APR. APR folds origination fees into an effective yearly cost so that loans can be compared; it is deliberately not the rate your payment is computed from. Feeding an APR into this formula overstates your payment by a few dollars a month.
Notice also what the formula does not contain: any reference to your home's value, your credit score, or your down payment. Those determine what rate and what principal you are offered. Once the note is signed, the payment depends on three numbers only.
Worked example: $360,000 at 6.5% over 30 years
Take a $400,000 home with 10% down, so you borrow $360,000 at 6.5% for 30 years, with $4,800 a year in property tax, $1,800 a year in insurance, $50 a month in HOA dues, and PMI at 0.55%.
- Convert the rate. r = 6.5 ÷ 100 ÷ 12 = 0.00541667 per month.
- Count the payments. n = 30 × 12 = 360.
- Compute the discount factor. (1.00541667)−360 = 0.1430251. Subtract from 1: 0.8569749.
- Multiply principal by the rate. $360,000 × 0.00541667 = $1,950.00.
- Divide. $1,950.00 ÷ 0.8569749 = $2,275.45 principal and interest.
- Add escrow. Tax $4,800 ÷ 12 = $400. Insurance $1,800 ÷ 12 = $150. HOA = $50.
- Add PMI. $360,000 × 0.0055 ÷ 12 = $165 per month.
- Total. $2,275.45 + $400 + $150 + $50 + $165 = $3,040.45 per month.
Now check the first payment's split. Interest for month one is $360,000 × 0.00541667 = $1,950.00. Principal is $2,275.45 − $1,950.00 = just $325.45. In month one, 86% of your principal-and-interest payment is pure interest. That is not a trick of this particular loan — it is what amortisation looks like whenever the rate is high relative to the term.
How to read the result: what is a reasonable payment
Lenders judge affordability with two ratios, and you should apply them to yourself before an underwriter does.
The front-end ratio is your full housing payment — the whole PITI figure, including HOA — divided by gross monthly income. Conventional underwriting has historically looked for 28% or less. The back-end or total debt-to-income ratio adds every other monthly obligation: car loans, student loans, minimum credit-card payments, child support. Conforming loans generally cap this at 43% to 45%, and 50% at the outer edge with strong compensating factors. FHA underwriting is somewhat more permissive; jumbo lenders are usually stricter.
These are ceilings for approval, not targets for comfort. A payment that passes at 43% back-end leaves very little room for a roof, a furnace, or a lost bonus. If you want one number to aim at, keep total PITI at or under about 25% of gross income and you will rarely regret it.
Watch the escrow line separately. Property tax and insurance are the parts of your payment that will rise, and in some markets they have risen faster than wages for years. A lender's initial escrow estimate is often based on the seller's assessment, which may be well below what you will be assessed after the sale resets your basis. Ask for the current millage rate and the assessed value the county expects to use, and run your own number.
Monthly principal and interest per $1,000 borrowed
| Annual rate | 10 years | 15 years | 20 years | 30 years |
|---|---|---|---|---|
| 3.00% | 9.6561 | 6.9058 | 5.5460 | 4.2160 |
| 4.00% | 10.1245 | 7.3969 | 6.0598 | 4.7742 |
| 5.00% | 10.6066 | 7.9079 | 6.5996 | 5.3682 |
| 6.00% | 11.1021 | 8.4386 | 7.1643 | 5.9955 |
| 6.50% | 11.3548 | 8.7111 | 7.4557 | 6.3207 |
| 7.00% | 11.6108 | 8.9883 | 7.7530 | 6.6530 |
| 8.00% | 12.1328 | 9.5565 | 8.3644 | 7.3376 |
Principal and interest only — add your own escrow. Factors are the amortised-loan formula evaluated at each rate and term.
Why extra principal is so powerful early on
Every dollar you add to principal permanently removes all the future interest that dollar would have generated. Because the interest charge each month is the balance times the rate, a dollar paid in year 1 avoids nearly 30 years of compounding; the same dollar paid in year 25 avoids five.
The arithmetic is startling. On a $300,000 loan at 6% for 30 years, the required payment is $1,798.65 and total interest is $347,515. Add $200 a month — about 11% more — and the loan clears in 279 months instead of 360, saving roughly $91,000 in interest and taking almost seven years off the term. The extra payments themselves total about $55,800.
Two practical cautions. First, tell your servicer in writing that extra funds are to be applied to principal, not held as a prepaid next installment; otherwise many servicers park it and you gain nothing. Second, compare the guaranteed return against your other options: prepaying a 6.5% mortgage is a risk-free 6.5% return, which is excellent — but not before you have taken an employer 401(k) match, cleared credit-card debt, or built an emergency fund. A dollar in your mortgage is very hard to get back out.
If you would rather compare prepaying against refinancing, work through the refinance break-even calculator, and use the amortisation schedule calculator to see the month-by-month split.
PMI does not always fall off by itself
On conventional loans, the Homeowners Protection Act requires a servicer to terminate PMI automatically when your balance reaches 78% of the original value on the amortisation schedule, and to cancel it on your written request at 80%. Those are two different thresholds with two different triggers, and the earlier one requires you to ask. This calculator drops PMI at 80% loan-to-value, which is what you get if you make the request.
FHA loans are different: mortgage insurance premiums on most FHA loans written since 2013 last the life of the loan regardless of equity, and can only be removed by refinancing into a conventional mortgage.
Mistakes that make a payment estimate wrong
- Budgeting from principal and interest alone. The most common and most expensive error. Escrow can add 25–40% to the payment.
- Using the APR instead of the note rate. APR includes fees and is a comparison tool, not the rate your payment is derived from.
- Trusting the seller's tax figure. A sale often resets the assessed value. Get the millage rate and the expected new assessment from the county.
- Forgetting that escrow is re-analysed annually. Your payment will change even on a fixed-rate loan, and a shortfall can be collected over just 12 months.
- Ignoring PMI's threshold rules. Assuming it disappears at 20% equity without asking, or assuming FHA insurance behaves like conventional PMI.
- Comparing a 15-year and a 30-year loan by payment only. The 15-year payment is higher but the total interest is usually less than half. Compare both figures.
- Overlooking HOA dues. They are not escrowed on most loans, so they never appear on a lender's payment quote — but they still leave your account.
What this calculator assumes, and what it does not model
The calculation assumes a fixed rate, equal monthly payments, interest charged monthly on the declining balance, and payments applied at the end of each period. That describes the overwhelming majority of American residential mortgages.
It does not model: adjustable rates after the fixed period ends, interest-only or balloon structures, biweekly payment plans, simple-interest daily accrual (used by a minority of servicers), late fees, discount points paid at closing, or the tax treatment of mortgage interest. It assumes your tax, insurance and HOA figures stay constant, which they will not — treat any total-cost figure as a lower bound.
Closing costs are outside the payment entirely. Expect 2% to 5% of the purchase price in lender fees, title work, recording, prepaid interest and the initial escrow deposit. For a full picture of what you need at the table, and of how a different down payment changes both PMI and the payment, work through the home affordability calculator and the rent vs buy calculator.
Key terms
- Amortisation
- The process of retiring a debt through regular equal payments, each split between interest on the outstanding balance and principal reduction. Early payments are mostly interest; later ones are mostly principal.
- PITI
- Principal, Interest, Taxes and Insurance — the full housing payment lenders use in affordability ratios.
- Escrow (impound) account
- An account your servicer maintains from part of your monthly payment, out of which property tax and insurance premiums are paid when due. Re-analysed yearly.
- Loan-to-value (LTV)
- The loan balance divided by the property's value, as a percent. Drives PMI, pricing, and refinance eligibility. 80% is the pivotal threshold.
- PMI
- Private mortgage insurance. Protects the lender, not you, against default on a conventional loan with less than 20% equity. Typically 0.3%–1.5% of the loan per year.
- Note rate
- The contractual interest rate written into your promissory note — the rate the payment is calculated from, as distinct from the APR.