Your monthly mortgage payment is more than just principal and interest. Here's a complete breakdown of what you pay and how it's calculated.
The Four Components of a Mortgage Payment (PITI)
Most mortgage payments include four components, known collectively as PITI:
- Principal: The portion reducing your loan balance. Starts small and grows over time.
- Interest: The cost of borrowing. Starts large and shrinks as your balance decreases.
- Taxes: Property taxes collected monthly and held in escrow. Typically 1-2% of home value per year.
- Insurance: Homeowner's insurance protecting your property. Required by all lenders.
The Mortgage Payment Formula
The principal and interest portion is calculated using this formula:
M = P × [r(1+r)^n] / [(1+r)^n - 1]
Where M is monthly payment, P is loan principal, r is monthly interest rate (annual rate ÷ 12), and n is total number of payments (years × 12).
Real Example
For a $300,000 home with 20% down ($60,000), 30-year term at 6.5%:
- Loan amount: $240,000
- Monthly P&I: $1,517
- Property tax (~1.2%): $300/month
- Insurance: $117/month
- Total: $1,934/month
Over 30 years, you'll pay $306,016 in interest alone — more than the original loan! This is why interest rate matters so much.
When Is PMI Required?
If your down payment is less than 20%, you'll pay Private Mortgage Insurance (PMI), typically 0.3-1.5% of the loan annually. On a $300,000 loan, that's $75-$375/month extra. PMI is removed once you reach 20% equity.
30-Year vs 15-Year: Which Is Better?
A 15-year mortgage has higher payments but saves massively on interest. On a $240,000 loan at 6.5%: a 30-year costs $306,016 in total interest, while a 15-year costs just $136,788 — saving $169,228!
Use our mortgage calculator to compare different scenarios and see your exact monthly payment.