What a Mortgage Payment Really Includes, With Worked Numbers

A mortgage payment is made up of four parts, usually abbreviated to PITI: principal, interest, property tax and homeowner's insurance. Many borrowers also pay a homeowners' association (HOA) fee and, if their deposit was under 20 per cent, private mortgage insurance (PMI). For a 280,000 loan at 6.5 per cent over 30 years, principal and interest come to 1,769.79 a month, but once tax, insurance and an HOA fee are added, the true monthly figure in the example below is 2,365.62.

The numbers in this article are estimates, not advice. Tax rates, insurance premiums and fees vary by location and lender, so use them to understand the structure and then substitute your own figures.

Principal and interest

Principal is the money you borrowed. Interest is the lender's charge for lending it, calculated every month on the balance still owed. Together they form the loan repayment, and on a standard fixed-rate mortgage that repayment is the same every month for the whole term.

The split inside it is not the same. In month one of the example, interest is 280,000 × (0.065 ÷ 12) = 1,516.67, and only 253.12 of the 1,769.79 payment reduces the debt. By month 180, halfway through, interest has fallen to 1,104.09 and principal has risen to 665.70. In the final month almost the entire payment is principal. This is why the balance seems to move so slowly in the first years and why selling or refinancing early means you have paid a great deal of interest and little capital.

The payment is found with the same formula used for any amortising loan: P × r × (1 + r)^n ÷ ((1 + r)^n − 1), where r is the monthly rate and n the number of months. For the example, r = 0.065 ÷ 12 = 0.0054167 and n = 360, and the result is 1,769.79. The Loan EMI Calculator shows this part on its own with a full month-by-month schedule; the mortgage version adds the rest.

Property tax

Local government charges an annual tax on the assessed value of the property, and most lenders collect it monthly along with the loan payment and hold it in an escrow account until the bill is due. Rates vary widely, from under 0.5 per cent of the value a year in some areas to over 2 per cent in others, and the assessed value is often different from the purchase price.

In the example the home cost 350,000 and the local rate is 1.1 per cent, so the annual bill is 3,850 and the monthly escrow contribution is 3,850 ÷ 12 = 320.83. That figure will rise over time; assessments are revisited every few years and rarely go down.

Escrow is worth understanding because it is the part of the payment that changes. Once a year the lender compares what it collected with what it actually paid out in tax and insurance. If the bills came in higher, you receive a notice that the monthly contribution is going up, often with a one-off catch-up amount for the shortfall. Borrowers who are not expecting it see their "fixed" payment jump by 50 or 100 a month and assume the lender has made a mistake. It has not; the loan part is fixed and the escrow part floats.

Homeowner's insurance, HOA fees and PMI

Homeowner's insurance

Lenders require buildings insurance for at least the amount of the loan, and most policies also cover contents and liability. Premiums depend on the rebuild cost, the location and the risks that apply there; a house in a flood or wildfire zone can cost several times the national average to insure. The example uses 1,500 a year, which is 125.00 a month, also collected into escrow.

HOA fees

Flats, townhouses and many newer estates belong to a homeowners' association that maintains shared spaces, roofs, lifts or landscaping. The fee is paid to the association, not the lender, but it is just as compulsory and lenders count it when assessing affordability. The example uses 150 a month. Check whether the association has a healthy reserve fund; a low one means special assessments, which are one-off bills that can run to thousands.

Private mortgage insurance

If the deposit is less than 20 per cent of the price, the lender usually requires PMI, which protects the lender, not you, if you default. It typically costs 0.3 to 1.5 per cent of the loan amount per year depending on your credit score and deposit size, and it can be cancelled once the balance falls to 80 per cent of the original value. The example with a 20 per cent deposit has no PMI; the 10 per cent version below does.

The worked example in full

Purchase price 350,000, deposit 70,000 (20 per cent), loan 280,000 at 6.5 per cent fixed for 30 years.

Component	Basis	Monthly
Principal and interest	280,000 at 6.5% over 360 months	1,769.79
Property tax	1.1% of 350,000 = 3,850 a year	320.83
Homeowner's insurance	1,500 a year	125.00
HOA fee	Fixed by the association	150.00
PMI	Not required at 20% down	0.00
Total		2,365.62

The loan repayment is 75 per cent of the total. A buyer who budgets from the headline figure of 1,769.79 is short by almost 600 a month from the first payment. Over 30 years the principal and interest alone come to 1,769.79 × 360 = 637,124.40, of which 357,124.40 is interest, and that is before the tax and insurance bills, which will rise with inflation.

The Mortgage Calculator takes all five inputs and shows the combined figure, the loan-only figure and the lifetime interest side by side.

How the deposit changes everything

A larger deposit does three things at once: it reduces the loan and therefore the repayment, it reduces the lifetime interest, and at 20 per cent it removes PMI. The table keeps the 350,000 price and 6.5 per cent rate and assumes PMI at 0.5 per cent a year where the deposit is below 20 per cent.

Deposit	Loan	P&I	PMI	Loan + PMI	Lifetime interest
5% (17,500)	332,500	2,101.63	138.54	2,240.17	424,085
10% (35,000)	315,000	1,991.01	131.25	2,122.26	401,765
15% (52,500)	297,500	1,880.40	123.96	2,004.36	379,445
20% (70,000)	280,000	1,769.79	0.00	1,769.79	357,125
25% (87,500)	262,500	1,659.18	0.00	1,659.18	334,804

Moving from a 10 per cent deposit to 20 per cent costs an extra 35,000 up front and saves 352.47 a month, 44,640 in interest over the term, and the PMI altogether. That is a strong return on the extra cash, though not an automatic decision: emptying every savings account to reach 20 per cent leaves nothing for the repairs and surprises that arrive in the first year of ownership.

15 years or 30 years

The term is the second big lever. Shorter terms carry a higher payment and a lower lifetime cost, and lenders usually price 15-year loans a little cheaper than 30-year ones. The table uses the same 280,000 loan at the same 6.5 per cent so the effect of the term alone is visible, then adds a 15-year row at 6.0 per cent to reflect the typical discount.

Term and rate	Monthly P&I	Total repaid	Lifetime interest
30 years at 6.5%	1,769.79	637,124	357,124
20 years at 6.5%	2,087.60	501,024	221,024
15 years at 6.5%	2,439.10	439,038	159,038
15 years at 6.0%	2,362.80	425,304	145,304

At the same rate, the 15-year loan costs 669.31 more each month and saves 198,086 in interest. With the rate discount, the extra is 593.01 a month and the saving 211,820. The 20-year row is the compromise many people overlook: 317.81 more a month for a saving of 136,100.

A middle path is to take the 30-year loan and overpay. Adding 100 a month to the example clears it in 309 months, just under 26 years, and saves about 60,200 in interest, with the freedom to stop overpaying in a hard year. The 15-year loan forces the discipline; the overpayment keeps the flexibility. If you would invest the difference instead, the Compound Interest Calculator shows what 669 a month might grow to over the same 15 years, which is the honest comparison.

Affordability: the 28/36 rule

Lenders and advisers use two ratios as a first screen. The front-end ratio says the full housing payment, meaning PITI plus HOA and PMI, should be no more than 28 per cent of gross monthly income. The back-end ratio says all debt payments together, including car loans, student loans and credit-card minimums, should be no more than 36 per cent.

Lenders in many markets will approve higher ratios, sometimes well above 40 per cent on the back end, particularly for borrowers with strong credit. Approval is not the same as comfort. The 28/36 figures date from a time of higher interest rates and are conservative on purpose, which makes them a useful ceiling rather than a target.

What a calculator cannot know

Every mortgage calculator, including ours, works from the inputs you give it. It cannot see:

• Future tax and insurance bills. Both rise. A payment that fits today may be 10 per cent higher in five years with the loan unchanged.
• Rate changes. On an adjustable or tracker mortgage the interest resets, and the payment moves with it. The calculator shows one rate; your lender's cap and floor decide the rest.
• Maintenance. A common planning figure is 1 per cent of the home's value a year, which on a 350,000 home is about 292 a month that appears on no statement.
• Closing costs. Valuation, legal fees, origination fees and transfer taxes can total 2 to 5 per cent of the price and are paid before the first instalment.
• Your own life. Job security, a growing family, a planned move in three years. The amortisation schedule shows that selling in year three means you have repaid under 4 per cent of the loan, which matters if prices have not risen.

Where to go next

Enter your own price, deposit, rate, tax and insurance figures into the Mortgage Calculator to see the complete monthly outgoing, then try a 15-year term and a larger deposit to see which lever moves the total most. For the loan portion alone and its full schedule, the Loan EMI Calculator shows every month's split between interest and principal. Both run in your browser and keep nothing you type.

Related guides: how loan EMI is calculated.

Frequently asked questions

What does PITI stand for in a mortgage?

PITI is principal, interest, taxes and insurance, the four parts of a standard monthly mortgage payment. Principal repays the loan, interest is the lender's charge, taxes are the property taxes collected into escrow, and insurance is the homeowner's policy the lender requires. HOA fees and private mortgage insurance are often added on top, so the full outgoing can be 25 to 40 per cent higher than the loan repayment alone.

How much is the monthly payment on a 280,000 mortgage?

At 6.5 per cent over 30 years, principal and interest come to 1,769.79 a month. The complete payment depends on where the home is: adding property tax at 1.1 per cent of a 350,000 value, insurance of 1,500 a year and a 150 HOA fee brings it to 2,365.62. Over the full term the loan costs 637,124, of which 357,124 is interest, before tax and insurance are counted.

Is a 15-year mortgage worth it?

It saves a large amount of interest in exchange for a higher payment. On 280,000 at 6.5 per cent, the 15-year loan costs 2,439.10 a month against 1,769.79, and reduces lifetime interest from about 357,000 to about 159,000. It suits borrowers with a secure, comfortable income. Those who want flexibility can take the 30-year loan and overpay, which captures much of the saving while keeping the option to stop.

How much deposit do I need to avoid PMI?

Private mortgage insurance is normally required when the deposit is below 20 per cent of the purchase price, so 20 per cent is the threshold. On a 350,000 home that means 70,000. With 10 per cent down the loan is 315,000 and PMI at 0.5 per cent a year adds about 131 a month. PMI can usually be cancelled once the balance falls to 80 per cent of the original value, which the amortisation schedule will date for you.

What is the 28/36 rule for mortgages?

It is an affordability guideline. Your full housing payment, including tax, insurance, HOA and PMI, should not exceed 28 per cent of gross monthly income, and all debt payments together should not exceed 36 per cent. On 7,500 a month those limits are 2,100 and 2,700. Lenders may approve more, but the rule is a conservative ceiling that leaves room for maintenance, rising bills and savings.