How mortgage payments work: PITI, amortization, PMI and the true cost of a loan

A mortgage payment looks like one number on a statement, but it is several costs bundled together, and the biggest of them, interest, behaves in a way that surprises most first-time buyers. This guide walks through each part of the payment, the math lenders use, and the handful of choices (rate, term, down payment, extra payments) that decide what a home really costs you over the life of the loan. Every figure below is computed by our calculators from the inputs shown, and every rule links to the agency that sets it.

What’s in a mortgage payment

Most monthly payments have four parts, usually shortened to PITI:

• Principal: the part that pays down what you borrowed.
• Interest: what the lender charges for the loan, figured on the balance you still owe.
• Taxes: your property tax, usually collected monthly into an escrow account.
• Insurance: homeowners insurance, also usually paid through escrow.

On top of PITI you may pay mortgage insurance (private mortgage insurance on a conventional loan with a small down payment, or FHA’s premium on an FHA loan) and HOA or condo dues.

Take a $400,000 home bought with 20% down at 6.5% for 30 years, with $4,800 a year of property tax and $1,800 of insurance. The loan is $320,000, principal and interest come to $2,022.62, and the full monthly payment is $2,573.

Only the principal and interest is fixed by the loan. Taxes and insurance are pass-through costs that usually rise over time, which is why a “fixed-rate” payment can still go up when your escrow is recalculated.

How the principal and interest payment is calculated

Lenders use one standard formula for a fixed-rate loan. With L the loan amount, r the annual rate divided by 12, and n the number of monthly payments:

Payment = L × r ÷ (1 − (1 + r)⁻ⁿ)

The result is a level payment that, if you make every one on time, brings the balance to exactly zero on the last payment. The CFPB’s sample Loan Estimate shows the same math in practice: a $162,000 loan at 3.875% for 30 years has a monthly principal and interest payment of $761.78.CFPB↗ Our calculators reproduce that figure to the cent, along with the sample’s $15,773 of principal paid in the first five years.

Each month, the lender charges interest on the remaining balance (balance × annual rate ÷ 12) and applies the rest of your payment to principal. HUD publishes this same month-by-month method, cent rounding included, for its mortgage insurance calculations.HUD↗

Amortization: why early payments are mostly interest

Because interest is charged on what you still owe, it is largest at the start, when you owe the most. As the CFPB explains, most of an early payment goes to interest and the rest to principal; as the balance falls, you owe less interest each month, so more of the same payment goes to principal, until near the end almost all of it does.CFPB↗ That process is amortization.

The practical effects:

• Equity builds slowly at first. In the first years of a 30-year loan, your balance barely moves. The yearly table in the amortization calculator shows exactly how slowly.
• Selling or refinancing early means you’ve mostly paid interest. That matters when you compare the cost of moving in five years with staying for twenty.
• Extra principal early has the biggest effect, because it removes balance that would otherwise be charged interest for decades.

Over the full 30 years, the loan in the example above costs $408,141 in interest on top of the money borrowed.

How the interest rate changes what you pay

The rate has an outsized effect because it applies every month for decades. On a $300,000 loan for 30 years:

• At 6%, the payment is $1,798.65 and total interest is $347,515.
• At 7%, the payment is $1,995.91 and total interest is $418,524.

One percentage point changes the monthly payment by a modest amount but the lifetime interest by tens of thousands of dollars. That’s why shopping lenders and comparing Loan Estimates matters: the rate, not the price of the house alone, sets much of what you pay.

The interest rate is not the whole cost of borrowing, though. The APR folds in certain lender fees, and the Loan Estimate’s Total Interest Percentage shows total interest as a share of the loan; the CFPB’s sample shows a 4.274% APR on its 3.875% loan and a TIP of 69.45%.CFPB↗ Use those lines to compare offers side by side.

15-year vs 30-year

A shorter term raises the payment but cuts interest sharply, both because you pay for half as long and because the balance falls much faster. Shorter-term mortgages also generally carry lower interest rates.Federal Reserve Board↗

On the same $300,000 at 6%:

• 30 years: $1,798.65 a month, $347,515 of interest.
• 15 years: $2,531.57 a month, $155,683 of interest.

The 15-year loan costs far less in total, but its payment is much higher. A 30-year loan with voluntary extra payments sits in between: you keep the lower required payment for flexibility and still cut interest when you can afford to pay more.

Down payment, PMI and when it ends

On a conventional loan, putting less than 20% down usually means paying private mortgage insurance. PMI protects the lender, not you, if you stop paying. It is usually a monthly premium added to your payment, though it can also be paid upfront or both, and your Loan Estimate shows the exact amount.CFPB↗

PMI is not permanent. Under the Homeowners Protection Act:

• You can ask to cancel it once your balance reaches 80% of the home’s original value, if you’re current and meet the servicer’s conditions.CFPB↗
• Your servicer must end it automatically on the date the balance is first scheduled to reach 78% of the original value, based on the original amortization schedule, if you’re current.
• It must end no later than the month after the midpoint of the loan term.CFPB↗

The same $400,000 home with 10% down and a 0.5% PMI rate adds $150.00 a month, for a total payment of $2,975. Automatic termination comes in Jan 2036 (payment 109, 78% of original value).

The PMI rate here is only an illustration; actual rates depend on your credit and down payment, so use the quote on your Loan Estimate.

FHA and VA loans: a different kind of insurance

FHA loans allow as little as 3.5% down with a credit score of 580 or more, but they charge two premiums: an upfront premium of 1.75% of the base loan, which can be added to the loan, and an annual premium paid monthly. For 30-year FHA loans up to $726,200 the annual rate is 0.50% or 0.55% depending on the down payment, and with less than 10% down it lasts for the life of the loan.HUD↗ A $350,000 home with 3.5% down at 6.25% carries an annual rate of 0.55%, or $156.67 a month in the first year, and a total payment of $2,756.

VA loans for eligible Veterans and service members require no monthly mortgage insurance at all. Instead, unless they are exempt, borrowers pay a one-time funding fee based on the loan amount, the down payment and whether it’s their first VA loan.VA↗ A first-time borrower buying a $400,000 home with no money down pays a fee of $8,600, which can be financed.

Run your numbers through the FHA loan calculator and the VA loan calculator to compare them with a conventional loan.

Paying extra: the cheapest way to cut interest

Every extra dollar you pay toward principal stops being charged interest for the rest of the loan. On a $300,000, 30-year loan at 6.5%, adding $200 a month saves $103,450 and finishes the loan 6 years 11 months early.

The Federal Reserve gives a smaller illustration: adding $50 a month to a $200,000, 30-year loan at 6% shortens it by three years and saves more than $27,000 in interest.Federal Reserve Board↗

Two cautions: make sure your servicer applies the money to principal, and note that extra payments do not move the automatic PMI termination date, although they can let you request cancellation sooner.

How lenders decide how much you can borrow

Lenders mostly look at your debt-to-income ratio: all your monthly debt payments, including the new housing payment, divided by your gross monthly income.CFPB↗ Limits vary by program. Fannie Mae allows a total DTI of up to 36% on manually underwritten loans, up to 45% with strong credit and reserves, and up to 50% through its automated system.Fannie Mae↗ FHA’s manual limits start at 31% for the housing payment and 43% in total.

With a $100,000 salary, $500 a month of other debts and $40,000 down, a 36% limit supports a home of about $359,638, while the 45% stretch limit allows $463,267. Qualifying for the stretch figure doesn’t make it comfortable; the home affordability calculator shows both so you can choose.

When refinancing pays off

Refinancing to a lower rate lowers your payment, but closing costs come first. The Federal Reserve’s test is simple: divide the costs by the monthly savings to find how many months it takes to break even.Federal Reserve Board↗ Moving a $300,000 balance with 27 years left from 7% to a new 30-year loan at 6% saves $265 a month, and $6,000 of costs are recovered at Month 23 (1 year 11 months).

Watch the term, too. Restarting a 30-year clock on a loan with 27 years left stretches the debt, so the lifetime saving after costs, $15,044, is much smaller than the monthly saving suggests. The refinance calculator shows both.

The short version

• Your payment is principal and interest plus escrow for taxes and insurance, plus mortgage insurance and HOA dues when they apply.
• Early payments are mostly interest; equity builds slowly at first and faster later.
• The rate and the term drive the lifetime cost far more than small differences in price.
• PMI on a conventional loan ends automatically at 78% of the original value, or at the loan’s midpoint; FHA premiums follow HUD’s own schedule, and VA loans have a one-time funding fee instead.
• Extra principal payments, especially early ones, are the simplest way to cut total interest.

Try your own numbers: