Understanding Your Mortgage Payments
A mortgage is one of the largest financial commitments most people will ever make. Our Mortgage Calculator helps you demystify this commitment by estimating your monthly payment. This payment is typically composed of four parts, often abbreviated as PITI.
The Four Components of PITI
- Principal: The amount of money you borrowed to buy the home. Each payment reduces this balance.
- Interest: The cost of borrowing the money, paid to the lender. It's calculated as a percentage of the outstanding loan balance.
- Taxes: Property taxes, which are collected by your lender and paid to your local government.
- Insurance: Homeowners insurance, which protects your home against damage. If your down payment is less than 20%, you may also have to pay Private Mortgage Insurance (PMI).
How the Mortgage Payment is Calculated
The core of the calculation is the formula for a fixed-rate loan's monthly principal and interest (P&I) payment. The property taxes, homeowners insurance, and PMI are then added to this amount.
The monthly P&I payment (M) is calculated using the formula:
M = P[r(1+r)^n] / [(1+r)^n - 1]- P = The principal loan amount (the home price minus your down payment).
- r = Your monthly interest rate (your annual rate divided by 12).
- n = The total number of payments (loan term in years multiplied by 12).
Your total monthly payment will be: Total Payment = M + (Annual Taxes / 12) + (Annual Insurance / 12) + Monthly PMI
Practical Example
Imagine you want to buy a $350,000 home with a $70,000 down payment (20%). Your loan term is 30 years, and the interest rate is 6%. Let's assume annual property taxes are $4,200 and homeowners insurance is $1,200.
- Principal (P): $350,000 - $70,000 = $280,000
- Monthly Rate (r): 0.06 / 12 = 0.005
- Payments (n): 30 * 12 = 360
- Taxes per month: $4,200 / 12 = $350
- Insurance per month: $1,200 / 12 = $100
First, we calculate the Principal & Interest (M): $1,678.79.
Then, we add the other costs: $1,678.79 (P&I) + $350 (Taxes) + $100 (Insurance) = $2,128.79.
Your estimated total monthly mortgage payment would be $2,128.79. Since the down payment was 20%, there is no PMI in this example.