What goes into a mortgage payment — principal, interest, taxes and insurance

The number a mortgage rate calculator gives and the amount that actually leaves your account each month are often different. The gap is property tax and insurance — and understanding each part of the payment helps you compare homes and loans properly.

The four parts: PITI

• Principal — the part that pays down what you borrowed.
• Interest — the lender's charge on what you still owe.
• Taxes — property tax, divided into monthly amounts.
• Insurance — home insurance, and mortgage insurance if your lender requires it.

In many places, particularly the United States, lenders collect the tax and insurance with the mortgage payment and pay the bills for you from an escrow account. Elsewhere you may pay them separately — but either way, they are part of the monthly cost of owning the home. Some homes also carry association or service charges.

A worked example

A home costing 350,000, with a 20% deposit, at 6.5% over 30 years:

1. Deposit 70,000, so the loan is 280,000.
2. Principal and interest come to about 1,770 a month.
3. Property tax of 4,200 a year adds 350 a month.
4. Insurance of 1,200 a year adds 100 a month.

The total is about 2,220 a month, of which 1,770 goes to the mortgage itself. The Mortgage Calculator shows this breakdown for your own figures.

Why the interest total is so large

Over 30 years, that 280,000 loan costs about 357,000 in interest — more than the amount borrowed. It is not a trick of the calculator: you are borrowing a large sum for three decades, and in the early years most of each payment is interest because the balance is at its highest. The amortisation schedule shows the split shifting towards principal year by year. For the mechanics, see how EMI is calculated, which uses the same formula.

What changes the payment most

Each of these on the same 350,000 home, showing the monthly principal and interest and the total interest over the term:

• Rate: each percentage point moves this payment by roughly 90 a month, and the total by tens of thousands.
• Term: a 15-year loan costs about 670 more a month but saves around 198,000 in interest.
• Deposit: a smaller deposit means a bigger loan, and in many markets a deposit below 20% also brings mortgage insurance, adding to the monthly cost.

Paying more than the minimum

Any amount paid above the monthly payment goes straight to the balance, so every later month's interest is a little lower. On the 280,000 loan at 6.5%, a simple month-by-month model gives:

• 200 extra a month: paid off in about 22¾ years instead of 30, with about 101,000 less interest.
• 500 extra a month: paid off in about 17 years, with about 174,000 less interest.

Many mortgages limit how much you can overpay each year without a charge, especially during a fixed-rate period, so check your terms first. Whether overpaying beats saving or investing the money depends on your rate and circumstances.

Fixed and adjustable rates

With a fixed rate, the principal and interest stay the same for the fixed period. With an adjustable or variable rate, they move with the lender's rate, so the payment can rise. When comparing a variable deal, work out the payment at a rate one or two points higher too, to see whether it would still be affordable.

Costs the monthly payment does not show

• One-off purchase costs such as fees, legal costs and in some countries transfer taxes.
• Maintenance and repairs, often estimated at around 1% of the home's value a year.
• Utilities and running costs, which tend to be higher in a larger home.

Using the figures

Try several deposits, rates and terms rather than a single scenario, and include realistic tax and insurance figures for the area. The result is an estimate, not a quote — lenders add fees and use their own terms — and nothing here is financial advice. For other loans, the Loan Calculator compares weekly, fortnightly and monthly repayments, and the EMI Calculator shows a full schedule.