What goes into a mortgage payment
Most buyers think of a mortgage payment as principal and interest, but the check you write each month usually covers more. Lenders often collect property taxes and homeowners insurance along with the loan payment and pay those bills for you from an escrow account. If you put less than 20% down on a conventional loan, private mortgage insurance is added, and condos and some neighborhoods add HOA dues. This calculator adds all of them so you see the full monthly number.
How each part is calculated
Principal and interest come from the loan amount, rate and term using the standard formula for a fixed-rate loan, so that part of the payment stays the same for the life of the loan. Property tax is the yearly rate you enter times the price, divided by 12. Insurance is the yearly premium divided by 12. PMI is estimated from your down payment unless you enter the rate your lender quoted.
An example
A $650,000 home with 10% down at 6.5% on a 30-year loan borrows $585,000. Principal and interest are about $3,698 a month. With property taxes at 1.5% ($813 a month), insurance at $1,800 a year ($150) and PMI of about $244, the full payment is about $4,904 a month.
Where the money goes over time
Early payments are mostly interest. In the example above, only about $6,500 of the first year’s principal-and-interest payments reduces the balance; the rest is interest. Each year a little more goes to principal. The balance table shows how much you’d owe after 5, 10, 15 years and beyond, which is useful if you expect to sell or refinance.
Common mistakes
- Leaving out taxes and insurance. In high-tax towns they can add a third or more to the payment.
- Using last year’s tax bill for a home you’re buying. Taxes may be reassessed after a sale in some places.
- Forgetting that taxes and insurance can rise over time even though principal and interest stay fixed.
Questions buyers ask
Does my mortgage payment include property taxes?
Often yes. Many lenders collect taxes and insurance monthly through an escrow account and pay the bills for you. Even if yours doesn’t, you still pay them, so they belong in your budget.
Why does my payment change if my rate is fixed?
The principal and interest part stays the same, but property taxes and insurance can change each year, which changes the escrow part of the payment.
How can I lower my monthly payment?
A larger down payment, a lower price, a lower rate (for example by paying points) or a longer term all lower it. Removing PMI once you reach enough equity also helps.