In short: A mortgage payment has two layers. Principal and interest come from one formula: $320,000 at 6.5% over 30 years is $2,022.62 a month. On top sit property tax, homeowners insurance and, with less than 20% down, mortgage insurance. Together those make PITI. On a $400,000 home with 20% down, an average 0.89% property tax and $125 a month of insurance, the total is $2,443.55.
The four letters in PITI
Most lenders quote a monthly housing payment as PITI:
- Principal, the part that repays the loan.
- Interest, the lender's charge on the balance still owed.
- Taxes, the property tax on the home, usually collected monthly and paid by the lender from an escrow account.
- Insurance, the homeowners policy, also often paid through escrow.
Principal and interest are fixed for the life of a fixed-rate loan. Taxes and insurance are estimates that change when the tax bill or the premium changes, which is why an escrow payment can rise even though the mortgage rate never moves. Mortgage insurance, when it applies, is a fifth item, and homeowners association dues are paid separately but belong in any honest budget.
The principal and interest formula
The principal and interest payment is the fixed amount that brings the balance to exactly zero after the last payment. For a loan of P at a monthly rate r over n months:
Payment = P × r ÷ (1 − (1 + r)^−n)
Take a $400,000 home bought with 20% down, so the loan is $320,000, at 6.5% over 30 years.
- The monthly rate r is 6.5% divided by 12, which is 0.541667%.
- The number of payments n is 30 × 12, which is 360.
- Over 360 months, (1 + r) compounds to 6.9918, so (1 + r)^−n is about 0.1430.
- The payment is 320,000 × 0.00541667 ÷ (1 − 0.1430), which is $2,022.61768.
A payment cannot include fractions of a cent, so it is charged as $2,022.62. The schedule absorbs that rounding in the final payment, which on this loan is $2,020.06; why your final loan payment is different explains why.
Where the first payment goes
In the first month, interest is the balance times the monthly rate: $320,000 × 0.541667% is $1,733.33. The remaining $289.29 of the $2,022.62 repays principal, and the balance falls to $319,710.71.
Each later month repeats the same steps on a slightly smaller balance, so interest falls and principal rises by the same amount. Over 30 years this loan charges $408,140.64 of interest on $320,000 borrowed. The reason so much of the early payment is interest is covered in why early loan payments are mostly interest.
How the rate moves the payment
The rate is the single biggest lever on the payment. The same $320,000 over 30 years:
| Rate | Monthly principal and interest | Total interest over 30 years |
|---|---|---|
| 5.5% | $1,816.92 | $334,095.47 |
| 6.0% | $1,918.56 | $370,683.35 |
| 6.5% | $2,022.62 | $408,140.64 |
| 7.0% | $2,128.97 | $446,426.56 |
| 7.5% | $2,237.49 | $485,490.91 |
Each half point adds roughly $100 to $110 a month on this balance and about $36,500 to $39,000 of interest over the full term.
How the term moves the payment
A shorter term raises the payment and cuts the interest sharply.
| Loan | Monthly principal and interest | Total interest |
|---|---|---|
| $320,000, 30 years at 6.5% | $2,022.62 | $408,140.64 |
| $320,000, 15 years at 6.5% | $2,787.54 | $181,758.21 |
| $320,000, 15 years at 6.0% | $2,700.34 | $166,061.68 |
At the same 6.5%, the 15-year loan costs $764.92 more a month and saves $226,382.43 of interest. Lenders often price 15-year loans lower than 30-year ones; the third row shows the same loan half a point lower, as an illustration rather than a quoted market spread.
Adding taxes and insurance
Property tax is set by local government on the home's assessed value, so it is a share of the price rather than the loan. The average effective rate across the 50 states in the site's property tax table is 0.8878%. That is an unweighted mean of state averages, useful for illustration, while a real bill depends on the county and the assessment.
On a $400,000 home, 0.8878% a year is $3,551.20, or $295.93 a month.
Homeowners insurance depends on the home, the location and the policy. Using $125 a month as an example premium, the full monthly payment for the $400,000 home with 20% down is:
| Component | Monthly amount |
|---|---|
| Principal and interest | $2,022.62 |
| Property tax at 0.8878% | $295.93 |
| Homeowners insurance (example) | $125.00 |
| Total PITI | $2,443.55 |
Property tax and insurance add $420.93 a month, more than a fifth of the total, and both can rise over time while principal and interest stay fixed.
The down payment and mortgage insurance
A smaller down payment means a larger loan and a larger payment. On the same $400,000 home at 6.5% over 30 years:
| Down payment | Loan amount | Principal and interest | Total interest |
|---|---|---|---|
| 20% ($80,000) | $320,000 | $2,022.62 | $408,140.64 |
| 10% ($40,000) | $360,000 | $2,275.44 | $459,164.00 |
| 5% ($20,000) | $380,000 | $2,401.86 | $484,667.97 |
On a conventional loan, a down payment below 20% usually also brings private mortgage insurance, which protects the lender, not the borrower. The premium varies with the loan and the borrower's credit and is shown on the Loan Estimate.
PMI does not last for the life of the loan. Under the federal Homeowners Protection Act, which covers borrower-paid PMI on a principal residence, there are three exits:
- The borrower can ask in writing to cancel PMI once the balance reaches 80% of the home's original value, if the loan is current and the other conditions in the Act are met.
- PMI must end automatically on the date the balance is scheduled to reach 78% of original value, if the loan is current.
- PMI must end at the midpoint of the loan's term, if the loan is current, whatever the balance.
For the 5% down example, with an illustrative PMI premium of $158 a month, the engine's schedule gives:
| Route | Payment at which PMI ends | PMI paid in total |
|---|---|---|
| Written request at 80% | Payment 124 | $19,592.00 |
| Automatic termination at 78% | Payment 135 | $21,330.00 |
| Midpoint of the term | Payment 180 | Not reached first |
Asking at 80% instead of waiting for 78% saves $1,738.00 here. Paying $200 a month of extra principal brings the 80% point forward to payment 87, cutting total PMI to $13,746.00. Extra principal does not move the 78% automatic date, which follows the original schedule.
With 10% down on the same home and an illustrative $100 premium, the 80% request point arrives at payment 95 and automatic termination at payment 109.
FHA loans carry their own mortgage insurance premium under different rules, and the Homeowners Protection Act timelines above do not apply to them.
What extra payments do
Paying more than the scheduled amount reduces principal directly, so less is outstanding to be charged interest in every later month. The scheduled payment stays the same; the loan ends sooner. For the $320,000 loan at 6.5%:
| Extra principal each month | Payments to pay off | Months saved | Interest saved |
|---|---|---|---|
| $100 | 314 | 46 | $61,698.04 |
| $168.55 (one extra payment a year, spread monthly) | 290 | 70 | $93,072.07 |
| $250 | 267 | 93 | $122,992.85 |
| $500 | 216 | 144 | $185,551.21 |
The $168.55 row is one twelfth of the monthly payment added each month, which amounts to thirteen payments a year instead of twelve. It takes almost six years off the loan.
What the payment does not include
The formula covers a fixed-rate, fully amortizing loan. It does not describe an adjustable-rate loan after its first rate change, an interest-only period, or a balloon payment. It also leaves out costs paid outside the monthly payment: closing costs, maintenance, utilities and HOA dues. A lender's debt-to-income test uses the full housing payment, so budgeting on principal and interest alone understates what the lender will count.
Common mistakes
Budgeting on principal and interest alone. In the example above, taxes and insurance add $420.93 a month to a $2,022.62 payment.
Assuming the escrow payment is fixed. It is recalculated, usually once a year, when the property tax or insurance changes. Principal and interest are what stay fixed.
Waiting for PMI to fall off on its own. Automatic termination comes at 78% of original value. A written request at 80% can end it earlier, and extra principal brings that date forward further.
Comparing payments at different terms as if they were the same product. A 30-year loan has the lower payment and by far the higher total interest.
Try it with your own numbers
The mortgage calculator works out principal and interest with taxes and insurance for your price, down payment and rate. The PMI removal calculator finds the 80% and 78% dates for your loan, and the mortgage payoff calculator shows what extra payments save. The APR vs interest rate guide explains how fees change the real cost.
Frequently asked questions
How is a monthly mortgage payment calculated?
What does PITI stand for?
Why did my mortgage payment go up if my rate is fixed?
When does PMI come off a conventional loan?
Is it better to make extra payments or choose a shorter term?
Sources
- Regulation Z (Truth in Lending), 12 CFR Part 1026, the federal rules governing how the cost of consumer credit is computed and disclosed. ecfr.gov/current/title-12/chapter-X/part-1026
- Homeowners Protection Act of 1998, 12 U.S.C. 4902, termination of private mortgage insurance at borrower request, automatically, and at the midpoint of the amortization period. law.cornell.edu/uscode/text/12/4902
- Consumer Financial Protection Bureau, When can I remove private mortgage insurance (PMI) from my loan? consumerfinance.gov/ask-cfpb/when-can-i-remove-private-mortgage-insurance-pmi-from-my-loan-en-202