How Mortgage Payments Are Calculated: Principal, Interest, Taxes and Insurance

You find a house listed at $400,000. A friend says, "That will be about $2,600 a month." You nod, but you have no idea where that number came from. Is it just the price divided by something? Can you check it yourself?

You can, and it is easier than it looks. A mortgage payment is built from four parts, and each one has a simple rule. Once you know them, you can read any loan estimate and spot what changes the number.

The quick answer

• A monthly mortgage payment is usually PITI: principal, interest, property taxes and insurance.
• Principal and interest come from the loan amount, the rate and the term. For a fixed-rate loan, this part never changes.
• Property tax and home insurance are paid monthly into an escrow account, and they can go up over time.
• If you put down less than 20%, you will probably also pay PMI until you have enough equity.

Want to see your own number? Open the mortgage payment calculator, enter your home price and rate, and read the breakdown.

An example: a $400,000 home

Say you buy a $400,000 home with 20% down ($80,000). That leaves a $320,000 loan at 6.5% for 30 years. Here is the monthly payment:

The "$2,600 a month" your friend mentioned was a fair guess. Notice that taxes and insurance add more than $560 a month on top of the loan itself.

Part 1: Principal and interest

Principal is the money you borrowed. Interest is the lender's price for the loan. In a standard fixed-rate mortgage, the payment is the same every month, but the split inside it changes. At the start, most of the payment is interest. Over time, more goes to principal.

On our $320,000 loan, the first payment has about $1,733 of interest and only about $289 of principal. The interest part is simple: the balance times the monthly rate. At 6.5%, the monthly rate is 6.5% divided by 12, which is about 0.5417%. So $320,000 x 0.005417 = $1,733 for the first month.

The payment itself comes from a formula that makes the loan end at exactly zero after the last payment:

payment = loan x r x (1 + r)^n / ((1 + r)^n - 1)

Here r is the monthly rate and n is the number of months. You do not need to do it by hand: a calculator does it in a blink. What matters is what moves it. A higher loan, a higher rate or a longer term raises the total interest. Over 30 years, this loan costs $728,100 in total payments, of which about $408,100 is interest.

Part 2: Property tax

Property tax is charged by your county or city, once or twice a year, based on the value of your home. The national average effective rate is around 1% of the home value, but it varies a lot by state: from about 0.3% in Hawaii to more than 1.7% in places like Illinois and New Jersey. Within a state it can differ by town too.

When you buy a home, tax can also jump. The county may reassess the home at your purchase price, which can be higher than the old owner paid in tax. Ask what the tax will be for you, not what the seller paid.

Part 3: Home insurance

Lenders require homeowners insurance. Cost depends on where you live, how old the house is, its rebuilding cost and your claims history. Recent national estimates for a home with a $300,000 rebuild value are in the range of $2,400 to $2,900 a year, with some states far above (such as places with hurricane or hail risk) and others far below. Get a real quote before you decide on a house.

Part 4: PMI (private mortgage insurance)

If your down payment is under 20% on a conventional loan, the lender usually requires PMI. It protects the lender if you stop paying. It typically costs about 0.5% to 1.5% of the loan amount per year, depending on your credit score and down payment.

Try the same home with only 5% down ($20,000). The loan becomes $380,000, principal and interest rises to $2,401.86, and PMI at 0.6% adds $190 a month. The full payment is about $3,158, which is almost $570 a month more than with 20% down.

The good news is that PMI does not last forever. You can ask the lender to cancel it when your balance falls to 80% of the home's original value, and it must end automatically when you reach 78%, as long as you are current on payments. In the 5% down example, that is after about 11 years on the normal schedule. Extra payments get you there sooner. FHA loans use a different kind of mortgage insurance with its own rules.

Principal and interest by price and rate

Here is the principal and interest part (not taxes or insurance) for a 30-year fixed loan with 20% down:

A half-point change in rate moves a $400,000 home's payment by about $100 a month. Rates change often, so treat these as examples and check what lenders are offering today.

How the term changes everything

Take the $320,000 loan again. A 30-year loan at 6.5% has a payment of $2,023 and costs about $408,100 in interest. A 15-year loan at a lower example rate of 5.75% has a payment of about $2,657 and costs about $158,300 in interest. You pay about $634 more per month, and you save about $249,800 over the life of the loan.

That does not make 15 years right for everyone. A payment you cannot keep up is worse than a longer loan. A common plan is to take the 30-year loan and then add extra payments when you can. Read how to pay off your mortgage early for the numbers.

How much house can you afford?

Lenders often use two guides. The first says your total housing payment should be below about 28% of your gross monthly income. The second says all your debt payments together (housing, car, student loans, cards) should stay below about 36%. Different loans have different limits, but these are a good rough check.

For the $2,589 payment above, 28% means a gross income of about $111,000 a year. Use the paycheck calculator to see your take-home pay, and compare the payment with your budget. The 50/30/20 rule is a useful check: housing should fit into the "needs" half along with your other must-pay costs.

Mistakes that make a payment feel bigger than planned

• Looking only at principal and interest. Taxes and insurance often add 20% to 30% on top.
• Forgetting HOA fees and maintenance. A common rule is to set aside 1% of the home's value each year for repairs.
• Using the seller's property tax bill. It may be reassessed after you buy.
• Not planning for rises. Fixed-rate principal and interest does not change, but tax and insurance can, so your total can rise.
• Stretching to the maximum. Being approved for a payment is not the same as being comfortable with it.

Frequently asked questions

How is a monthly mortgage payment calculated?

The lender uses the loan amount, the interest rate and the number of months to find a fixed payment of principal and interest. Property tax and home insurance (and PMI if it applies) are added to give the full monthly cost.

What does PITI mean?

PITI stands for principal, interest, taxes and insurance, the four parts of most monthly mortgage payments.

Why does my mortgage payment change if I have a fixed rate?

Your principal and interest stays the same, but property tax and insurance can change each year, and your escrow payment follows them. Removing PMI also lowers the total.

How much is the mortgage payment on a $400,000 house?

With 20% down at 6.5% for 30 years, principal and interest is about $2,023 a month. With typical taxes and insurance, the full payment is around $2,500 to $2,700 a month.

How can I lower my monthly mortgage payment?

A bigger down payment, a lower rate, a longer term, a cheaper house or removing PMI as soon as you can. Refinancing to a lower rate can also help when rates drop enough to cover the closing costs.

The bottom line

A mortgage payment is not a mystery. It is a fixed loan payment plus taxes, insurance and sometimes PMI, and each part can be checked. Before you fall in love with a house, run the full number, not only the loan part. For official, plain-language guides to buying a home and reading your loan estimate, see the Consumer Financial Protection Bureau's homeownership resources.