The four parts
Lenders often shorten it to PITI: principal, interest, taxes and insurance.
- Principal pays down what you borrowed.
- Interest is the lender's charge for the loan.
- Property tax is set locally and is usually collected monthly by the lender and passed on.
- Home insurance is usually handled the same way.
Homeowners association dues and mortgage insurance, where they apply, sit on top.
A worked example
Take a $400,000 home with $80,000 down, so a $320,000 loan over 30 years. At an example rate of 6.5%, with $4,800 a year in property tax and $1,800 in insurance:
| Part | Each month |
|---|---|
| Principal and interest | $2,022.62 |
| Property tax | $400.00 |
| Home insurance | $150.00 |
| Monthly payment | $2,572.62 |
These are the starting values in our mortgage calculator, so you can change any of them to match your own numbers. The rate is only an example, not today's rate.
Why early payments are mostly interest
Interest is charged on what you still owe. In the first month of the example, $1,733.33 of the $2,022.62 is interest and only about $289 comes off the loan. Each month a little more goes to principal, and by the end almost all of it does.
15 years or 30
On the same loan and rate, a 15-year term raises principal and interest to $2,787.54 a month, but total interest falls from about $408,000 to about $182,000. Shorter loans usually carry a lower rate as well, which widens the gap.
Mortgage insurance
With less than 20% down on a conventional loan, lenders usually require private mortgage insurance. You can ask for it to be removed once the loan is paid down to 80% of the home's original value, and it has to end automatically at 78% if your payments are up to date. Our calculator leaves it out.
The figure to rely on
A calculator gives you a planning number. The Loan Estimate a lender gives you after you apply sets out the real payment, rate and closing costs, and you can compare Loan Estimates from different lenders line by line. This guide is general information, not financial advice.