What a mortgage payment actually includes
A mortgage is a loan secured against property. You borrow the purchase price minus your down payment, and repay it in equal monthly instalments over a fixed term — usually 15 or 30 years. Miss enough payments and the lender can take the house, which is what "secured" means in practice.
The number most people quote as "my mortgage" is really four or five separate things bundled into one monthly transfer. Lenders call it PITI:
- Principal — the part that actually reduces what you owe.
- Interest — the lender's charge for the money. Early on this dominates.
- Taxes — property tax, collected monthly by the lender and held in escrow until the bill arrives.
- Insurance — homeowners insurance, also escrowed.
Two more can be added on top. PMI (private mortgage insurance) applies when your down payment is under 20%; it protects the lender, not you, and falls away once you have 20% equity. HOA fees apply in condos and managed communities and are paid separately, but they are part of your real housing cost, so this calculator includes them.
The mortgage payment formula
The principal-and-interest portion uses the standard amortising loan formula. Every lender in the world uses this same equation:
- M
- Monthly principal and interest payment
- P
- Principal — the amount borrowed (home price minus down payment)
- r
- Monthly interest rate — the annual rate divided by 12, as a decimal
- n
- Total number of monthly payments — years × 12
The other components are simpler. Monthly property tax is the annual tax divided by 12. Monthly insurance is the annual premium divided by 12. PMI is the annual PMI rate applied to the loan balance, divided by 12, and it stops as soon as the balance falls below 80% of the original home value.
Note what the formula implies: interest is charged on the remaining balance, which shrinks every month. So the interest portion of each payment falls over time and the principal portion rises, even though the total payment stays flat. That crossover is why the balance chart above curves rather than falling in a straight line.
A worked example
Over 30 years you repay $320,000 of principal plus $408,142 of interest — the loan costs more than the house.
What changes if you put down less
Drop the down payment to 10% ($40,000) on the same house and three things happen at once: you borrow $360,000 instead of $320,000, the payment rises to $2,275.44, and PMI at 0.5% adds another $150 a month until you reach 20% equity. The monthly cost goes from $2,547.62 to $2,950.44 — about $403 more for keeping $40,000 in your pocket.
How much house can you actually afford?
Lenders apply two rules of thumb, and it is worth knowing both because they disagree.
The 28/36 rule says your housing payment should not exceed 28% of gross monthly income, and total debt payments should not exceed 36%. On a $100,000 salary that is $2,333 a month for housing and $3,000 for all debts combined.
The debt-to-income (DTI) limit is what underwriters actually enforce. Most conventional loans cap DTI at 43%, and some go to 50% with strong compensating factors like a large down payment or cash reserves.
| Gross annual income | 28% housing budget | Approximate home price |
|---|---|---|
| $60,000 | $1,400 / mo | $220,000 |
| $80,000 | $1,867 / mo | $293,000 |
| $100,000 | $2,333 / mo | $366,000 |
| $150,000 | $3,500 / mo | $549,000 |
| $200,000 | $4,667 / mo | $732,000 |
These figures assume the whole housing budget goes to PITI. If your property tax rate is above 1.2%, or you are buying a condo with HOA fees, the affordable price drops accordingly.
Four ways to pay less interest
1. Shorten the term
A 15-year loan on $320,000 at 6.5% costs $2,787 a month rather than $2,023 — but total interest falls from $408,142 to $181,758. You pay $765 more each month and save $226,385 over the life of the loan. Shorter terms also usually carry a lower rate, typically 0.5–0.75 percentage points below the 30-year equivalent.
2. Pay a little extra each month
Extra payments go entirely to principal, so they compound in your favour. On the same $320,000 loan, an extra $200 a month clears the mortgage 6 years 7 months early and saves roughly $105,400 in interest. Try it in the advanced options above.
3. Put down 20%
Beyond avoiding PMI, a larger down payment shrinks the principal that interest is charged on. It is also the single easiest way to lower a payment when rates are high.
4. Improve your credit score before applying
The gap between a 620 and a 760 credit score is commonly 0.5 to 1.5 percentage points on the rate. On a $320,000 30-year loan, one percentage point is about $210 a month and $75,000 over the term. Six months of deliberate credit repair is often the highest-return work available to a buyer.
| Rate | 30-year | 20-year | 15-year |
|---|---|---|---|
| 5.0% | $1,718 | $2,112 | $2,530 |
| 5.5% | $1,817 | $2,201 | $2,615 |
| 6.0% | $1,919 | $2,293 | $2,700 |
| 6.5% | $2,023 | $2,386 | $2,787 |
| 7.0% | $2,129 | $2,482 | $2,876 |
| 7.5% | $2,237 | $2,579 | $2,966 |
Frequently asked questions
How much should I put down on a house?
20% is the threshold that removes PMI and gets you the best conventional rates. But it is not a requirement — conventional loans start at 3%, FHA loans at 3.5%, and VA and USDA loans can go to 0% for those who qualify.
The trade-off is straightforward: a smaller down payment means a bigger loan, a higher payment, PMI on top, and more interest overall. A larger one means less cash on hand for emergencies and closing costs. Most advisers suggest keeping three to six months of expenses in reserve rather than emptying savings to hit 20%.
What is a good mortgage interest rate?
"Good" is relative to the market at the time. Rates are set by the wider bond market, not by individual lenders, so what matters is how your quote compares with the current average — and whether you shopped around.
Getting quotes from three or more lenders typically saves 0.1 to 0.3 percentage points, which on a $320,000 loan is $20 to $65 a month. Multiple mortgage enquiries within a 45-day window count as a single hard pull on your credit, so shopping around costs you nothing.
When can I stop paying PMI?
Under the US Homeowners Protection Act, your lender must automatically cancel PMI once the balance reaches 78% of the original purchase price, based on the original payment schedule. You can request cancellation earlier, at 80%, in writing.
If your home has appreciated, you may be able to reach 80% sooner than the schedule suggests — but you will usually need to pay for an appraisal to prove it. Note that FHA loans work differently: mortgage insurance premiums generally last the life of the loan unless you put down 10% or more, in which case they run 11 years.
Should I choose a 15-year or 30-year mortgage?
A 15-year loan costs far less overall — on $320,000 at 6.5%, roughly $226,000 less in interest — and usually carries a lower rate. A 30-year loan costs more but leaves several hundred dollars a month free.
The practical question is what you would do with that difference. If it would go into a retirement account returning more than your mortgage rate, the 30-year loan may leave you better off. If it would simply be spent, the 15-year loan is forced saving. A middle path is taking the 30-year loan for the flexibility, and voluntarily paying it like a 15-year one.
What are closing costs and how much are they?
Closing costs are the one-off fees paid when the sale completes, typically 2% to 5% of the loan amount. On a $320,000 loan that is $6,400 to $16,000, and it is separate from your down payment.
They cover loan origination, appraisal, title search and title insurance, credit reporting, recording fees, and prepaid property tax and insurance for the escrow account. Your lender must provide a Loan Estimate within three business days of your application listing all of them, and a Closing Disclosure three days before completion.
Does this calculator work for mortgages outside the US?
The core payment maths is universal — the same amortisation formula applies everywhere. Use the currency selector to switch to GBP, EUR, CAD, AUD or INR.
What differs is the local structure. UK mortgages are usually fixed for 2–5 years then revert to a variable rate, so the 25-year projection is indicative rather than contractual. Canadian mortgages compound semi-annually rather than monthly, which makes the true payment slightly lower than shown. Indian home loans are typically floating-rate — our EMI calculator is the better fit there.
How does an extra monthly payment shorten the loan?
Your required payment is fixed, and a set portion of it covers that month's interest. Anything extra bypasses interest entirely and reduces the principal directly. A smaller principal means less interest is charged next month, so more of the following payment goes to principal too. The effect compounds.
On a $320,000 loan at 6.5% over 30 years, $200 extra a month clears it in 23 years 5 months and saves about $105,400. Confirm with your lender that extra payments are applied to principal and that there is no prepayment penalty.