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A mortgage is a loan used to buy a home, where the home itself is the collateral. If you stop paying, the lender can foreclose. Most mortgages in the US are 15-year or 30-year fixed-rate loans, paid monthly.

Your monthly payment usually includes much more than just the loan itself. The full picture is called PITI, which stands for Principal, Interest, Taxes, and Insurance. Add HOA fees and PMI when they apply, and you have everything that hits your bank account each month.

Breaking Down Each Piece

Principal is the part of your payment that reduces what you owe.

Interest is what the bank charges you for borrowing. Early in the loan, almost every dollar goes to interest. By the end, almost every dollar goes to principal. This is why paying extra principal in the first few years saves so much.

Property Tax is what your local government charges, usually 0.5% to 2.5% of the home’s value per year. The bank typically collects 1/12 of this each month and pays it on your behalf, through a holding account called an escrow.

Homeowners Insurance protects against fire, theft, and disasters. Lenders require it. Typical cost is $1,000 to $2,500 per year, paid through escrow.

HOA stands for Homeowners Association. If your neighborhood has shared amenities (pool, landscaping, security), the HOA charges a monthly fee. Condos and townhouses almost always have HOA dues; single-family homes often do not.

PMI stands for Private Mortgage Insurance. If you put down less than 20%, the bank requires PMI to protect itself in case you default. Typical cost is 0.3% to 1.5% of the loan amount per year. PMI is automatically removed when your loan balance reaches 78% of the home’s original value.

The Mortgage Payment Formula

The principal-and-interest part is calculated using the standard amortization formula:

M = P × [r(1+r)^n] ÷ [(1+r)^n − 1]

Where:

• M = monthly principal + interest payment
• P = principal (loan amount = home price minus down payment)
• r = monthly interest rate (annual rate ÷ 12)
• n = total number of payments (years × 12)

Worked Example

Home price: $400,000 Down payment: 10% = $40,000 Loan amount (P): $360,000 Annual rate: 7% Loan term: 30 years Property tax: 1.1% per year = $4,400/year = $367/month Insurance: $1,800/year = $150/month HOA: $50/month PMI rate: 0.6% per year on the loan = $2,160/year = $180/month

Monthly principal + interest: about $2,395 Total monthly payment: $2,395 + $367 + $150 + $50 + $180 = $3,142

When the loan balance drops to $312,000 (78% of $400,000), PMI automatically ends.

The 28/36 Rule (Affordability)

A common rule of thumb: your monthly housing cost (PITI) should not exceed 28% of your gross monthly income, and your total monthly debt — including the mortgage — should not exceed 36%. This is sometimes called the DTI (Debt-to-Income) rule. Lenders are stricter than this in tight credit markets.

If you earn $8,000 per month before taxes, a “safe” PITI is about $2,240. The example above ($3,142) would require an income closer to $11,200/month to stay within the 28% threshold.

15-Year vs. 30-Year

At the same rate, a 15-year mortgage has payments roughly 40% higher — but total interest paid is typically 50% to 60% less. On a $300,000 loan at 7%:

• 30-year: $1,996/month, $418,000 total interest
• 15-year: $2,696/month, $185,000 total interest

You save $233,000 in interest by going 15 years, but pay $700 more per month. The right choice depends on whether the higher monthly payment is comfortable for your income.

How to Lower Your Monthly Payment

The biggest levers, roughly in order of impact:

1. Lower interest rate — refinance when rates drop, or shop multiple lenders
2. Higher down payment — and avoid PMI by hitting 20%
3. Longer term — lower monthly payment, but more total interest paid
4. Cheaper home — the only one that actually saves money long-term

Buying down the rate with discount points can pay off if you plan to keep the loan more than 5 to 7 years. We have a separate calculator for that.