What Is a Mortgage?
A mortgage is a loan secured by real estate property. The lender provides capital to purchase a home, and the buyer agrees to repay the money over a set period (typically 15 or 30 years). Each monthly payment covers principal (the original amount borrowed) and interest (the cost of borrowing). In the U.S., the conventional 30-year fixed-rate mortgage is the most common, representing 70-90% of all mortgages.
Understanding the PITI Breakdown
Your total monthly mortgage payment is more than just principal and interest. When lenders evaluate your Debt-to-Income ratio, they look at the total PITI payment:
- Principal: The portion that reduces your loan balance and builds equity.
- Interest: The cost of borrowing the money from the lender.
- Taxes: Property taxes collected by the lender and held in an escrow account.
- Insurance: Homeowner's insurance required by all lenders to protect the property.
Mortgage Payment Formula
Principal and interest on a fixed-rate loan use the standard amortizing payment formula. Taxes, insurance, and PMI are added afterward. They are not inside this formula.
- M is the monthly principal-and-interest payment.
- P is the loan amount, after the down payment.
- r is the monthly rate: annual rate divided by 12.
- n is the number of monthly payments: years × 12.
Worked Example: $400,000 Home at 6.5%
A buyer purchases a $400,000 home with 20% down ($80,000). The loan is $320,000 at 6.5% fixed for 30 years.
- Monthly rate r = 0.065 / 12 = 0.0054167
- Number of payments n = 30 × 12 = 360
- Principal and interest M = $2,022.62
- First payment: about $1,733.33 interest and $289.29 principal
- Total interest over 30 years: about $408,142
The form above starts with these same inputs. Add its default ownership costs to reach PITI: $4,800 a year of property tax ($400 a month) and $1,500 a year of homeowner's insurance ($125 a month). With 20% down, the default PMI rate does not apply. The housing payment is about $2,547.62 a month. The calculator rounds that total to the nearest dollar. Local tax bills and insurance quotes replace the $4,800 and $1,500 assumptions.
The same $320,000 loan at 6.5% for 15 years costs about $2,787.54 a month and about $181,758 in interest. The shorter term costs roughly $765 more each month and saves about $226,000 of interest if the rate is identical. Adding $200 to the 30-year payment each month pays the loan off in about 23 years and 5 months and saves about $105,400 of interest.
Monthly Payment at 6.5% for 30 Years
These rows are principal and interest only, for a 30-year fixed loan at 6.5%. They do not include taxes, insurance, or PMI.
| Loan amount | Monthly P&I | Total interest |
|---|---|---|
| $200,000 | $1,264.14 | $255,089 |
| $300,000 | $1,896.20 | $382,633 |
| $320,000 | $2,022.62 | $408,142 |
| $400,000 | $2,528.27 | $510,178 |
| $500,000 | $3,160.34 | $637,722 |
A $400,000 loan is not the same as a $400,000 purchase with 20% down. The purchase example above borrows $320,000. Use the house affordability calculator to start from income, or the amortization calculator to see the balance year by year.
The 20% Down Payment Rule & PMI
If your down payment is less than 20%, lenders require Private Mortgage Insurance (PMI). PMI protects the lender (not you) if you default. It typically costs 0.3-1.9% of the loan amount annually. Once your loan-to-value ratio drops to 80%, you can usually request PMI removal, significantly lowering your monthly payment.
Fixed vs. Adjustable Rate Mortgages
A Fixed-Rate Mortgage offers stability — your interest rate never changes for the life of the loan. An Adjustable-Rate Mortgage (ARM) offers a lower initial rate for a set period (e.g., 5 or 7 years), after which the rate adjusts based on market indexes. ARMs are best for buyers who plan to sell or refinance before the initial period ends.
The Power of Extra Payments
Early in a 30-year mortgage, nearly 80% of each payment goes toward interest. Making extra payments attacks the principal directly, which has a compounding savings effect:
Extra Monthly
Adding even $100-200 extra per month can save tens of thousands in interest and reduce the loan term by several years.
Bi-Weekly Payments
Paying half your monthly payment every two weeks results in 13 full payments per year instead of 12, shaving years off the loan.
Buy Down the Rate
Paying "points" at closing permanently lowers your rate. Great for long-term homeowners who plan to stay 10+ years.
The Role of Escrow
An Escrow Account is a neutral third-party account where the lender holds your tax and insurance payments. This ensures these critical bills are paid on time, protecting both you and the lender. Review your annual escrow statement — taxes and insurance often rise, which can increase your "fixed" mortgage payment.
Frequently Asked Questions
How is a mortgage payment calculated?▼
What is PMI and when is it required?▼
How much can I save with extra payments?▼
Should I choose a 15-year or 30-year mortgage?▼
What is the difference between fixed-rate and ARM?▼
What is the monthly payment on a $320,000 mortgage at 6.5%?▼
Disclaimer: This calculator provides estimates for educational purposes. Actual mortgage terms vary by lender, credit profile, and market conditions. Consult a mortgage professional for precise quotes.