How Your Mortgage Payment Is Calculated
Your monthly mortgage check covers more than the loan itself. Here is exactly where every dollar goes — principal, interest, taxes, insurance, and PMI — with a real worked example you can verify yourself.
The short answer: PITI (+ PMI, + HOA)
Most monthly mortgage payments are made of four parts, remembered by the acronym PITI:
- Principal — the chunk that actually shrinks your loan balance.
- Interest — the lender's fee for lending you the money.
- Taxes — property tax, collected monthly into an escrow account and paid to your county on your behalf.
- Insurance — homeowners insurance, also escrowed and paid for you.
Two more may appear: PMI (private mortgage insurance, required on most conventional loans with less than 20% down) and HOA dues if your home is in a homeowners association. Principal and interest are fixed for the life of a fixed-rate loan; taxes, insurance, and PMI can change.
How principal & interest are calculated
Lenders don't split your payment evenly. They use the amortization formula:
M = P × r(1+r)n ÷ ((1+r)n − 1)
Where P is your loan amount, r is the monthly interest rate (annual rate ÷ 12), and n is the total number of payments (360 for a 30-year loan). The result is a fixed monthly payment, but the mix shifts over time: early payments are mostly interest, later payments are mostly principal. That's why the balance barely budges in the first few years.
Worked example: a $400,000 home
Assumptions: 20% down ($80,000), so a $320,000 loan at 6.75% fixed for 30 years. Property tax 1.1% of the home's value per year; homeowners insurance $1,800 per year.
- Principal & interest: $2,075.51 / month
- Property tax: $366.67 / month
- Homeowners insurance: $150.00 / month
- Total PITI: $2,592.18 / month
Notice the split: in month one, $1,800 of the $2,075.51 P&I payment is pure interest and only $275.51 reduces the balance. Over the full 30 years you'd pay about $427,185 in interest — more than the loan itself. That single fact is why the interest rate matters far more than most buyers expect.
What extra payments actually do
Paying an extra $200 a month on the example above cuts the loan from 30 years to 23 years and 4 months and saves about $112,078 in interest. Extra payments go straight to principal, which shrinks every future interest charge. Even one extra payment a year (or half-payments every two weeks) makes a visible dent. Try your own numbers in the extra payment calculator.
15-year vs. 30-year: the real tradeoff
On the same $320,000 loan at 6.0%, a 15-year term costs $2,700.34 a month in P&I versus $2,075.51 on a 30-year — about $625 more per month. The payoff: total interest drops from roughly $427,000 to about $166,000. A shorter term is a forced savings plan; a longer term buys monthly flexibility. Neither is "better" — it depends on your cash flow and what else you'd do with the difference.
Why your payment can change even on a "fixed" mortgage
Your loan servicer re-analyzes escrow once a year. If property taxes or insurance premiums rose — and both usually do — your monthly payment goes up to cover the shortfall, sometimes with a catch-up amount. The principal & interest portion never changes on a fixed-rate loan, but the PITI total often creeps up a few percent per year. Budget for it.
When PMI drops off
Put down less than 20% on a conventional loan and you'll pay PMI, typically 0.5–1% of the loan amount per year. The good news: you can request cancellation once your balance hits 80% of the home's original value, and the lender must drop it at 78% if you're current. On a rising market, a new appraisal showing 20% equity can also get it removed. (FHA loans are the exception — their mortgage insurance usually lasts the life of the loan with less than 10% down.)
FAQ
What does PITI mean in a mortgage payment?
PITI stands for Principal, Interest, Taxes, and Insurance — the four parts of a typical monthly mortgage payment. Principal pays down your loan balance, interest is the lender's charge, and taxes and insurance are usually collected monthly into an escrow account and paid on your behalf.
How is the principal and interest portion calculated?
With the amortization formula M = P × r(1+r)^n ÷ ((1+r)^n − 1): loan amount × monthly rate, scaled by the number of payments. Plug your own numbers into our mortgage calculator to see the breakdown instantly.
When does PMI go away?
On a conventional loan, request cancellation at 80% of the original value; the lender must remove it automatically at 78% if you're current. FHA mortgage insurance is different and usually lasts the life of the loan with less than 10% down.
Do property taxes and insurance change my monthly payment?
Yes. Both are re-estimated yearly by your servicer. If either rises, your escrow portion — and your total payment — increases, even though principal and interest stay fixed on a fixed-rate mortgage.
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Mortgage calculator · Extra payment calculator · How much house can I afford? · Rent vs. buy