A plain-language mortgage guide

A mortgage is a loan secured by the home you buy, repaid in equal monthly installments over a set number of years. Three numbers set the core payment (the amount you borrow, the interest rate and the term) and a handful of add-ons such as taxes, insurance and PMI turn that core payment into the amount you actually send each month. This guide walks through each piece and points you to the deeper articles in this library.

The three numbers behind the core payment

The loan amount is the purchase price minus your down payment. On a $375,000 home with $75,000 down, you borrow $300,000. The ratio of loan to price, called loan-to-value (LTV), is 80 percent in that case, and it matters because it decides whether PMI applies. See down payments explained for how that choice plays out.

The interest rate is the annual cost of borrowing, expressed as a percentage. The calculator assumes a fixed-rate loan, meaning the rate is set at closing and never changes. Adjustable-rate mortgages exist, but they follow rules the calculator does not model.

The term is the number of years you have to repay, most often 30 or 15. Each month's payment is split between interest on the remaining balance and principal that reduces it. Early on most of the payment is interest; late in the loan most of it is principal. What is amortization? explains that schedule, and principal vs. interest shows how the split shifts year by year.

M = P × r × (1 + r)^n ÷ ((1 + r)^n − 1)

Put those numbers together for the $300,000 loan at 6.5 percent over 30 years and the estimated P&I payment is approximately $1,896 per month, with roughly $382,600 of total interest over the full term. How mortgage payments work breaks that first payment down line by line.

What the full monthly payment includes

P&I is only part of what you pay. Most lenders collect several other costs with the mortgage payment, and the calculator adds them to produce a total monthly housing payment:

• Property taxes, set by your local government and usually billed annually. The calculator spreads the annual amount evenly across 12 months.
• Homeowner's insurance, also entered as an annual premium and divided by 12.
• Private mortgage insurance (PMI), usually required on conventional loans when the down payment is below 20 percent. It protects the lender, not you, and it typically ends once the balance falls far enough. What is PMI and when does it go away? covers the details.
• HOA dues, if the property belongs to a homeowners association.

Taxes and insurance are often paid through an escrow account: the lender collects a twelfth of the annual bills each month and pays them on your behalf when due. Because tax rates and premiums change, the escrow portion of your payment can rise or fall each year even though P&I never does. The calculator holds taxes, insurance and HOA constant, which is one reason its lifetime totals are estimates rather than predictions.

A worked example

Suppose you buy a $450,000 home with 10 percent down ($45,000), borrow $405,000 at 6.5 percent for 30 years, and enter $5,400 of annual property tax, $1,800 of annual insurance and $100 of monthly HOA dues. The calculator, using its default PMI rate of 0.5 percent of the original loan per year, estimates the first month's payment as follows.

The headline is approximately $3,429 per month. Because the loan starts at 90 percent LTV, PMI applies; based on the schedule it is charged for about 109 months, roughly 9 years 1 month, and adds an estimated $18,394 over that time. After it ends, the estimated payment falls to approximately $3,260. Over the whole term, the estimated interest is about $516,600, and the total estimated cost (loan, interest, PMI, taxes, insurance and HOA) is roughly $1,192,000, not counting the down payment or closing costs.

Those figures are estimates based on the assumptions entered. In practice, the tax and insurance lines would change over three decades, and the PMI rate depends on your credit profile and lender.

What changes the outcome

The calculator's comparison view runs two scenarios side by side. Four inputs move the result most.

Term. Keeping the $300,000 loan at 6.5 percent but repaying it over 15 years instead of 30 raises the estimated P&I payment from about $1,896 to about $2,613, roughly $717 more per month. In exchange, total interest falls from roughly $382,600 to roughly $170,400, an estimated saving of about $212,200.

Rate. On the same 30-year loan, a rate of 6.0 percent instead of 6.5 percent lowers the estimated payment to approximately $1,799, about $97 less per month, and trims total interest to roughly $347,500, about $35,100 less over the life of the loan.

Down payment. A larger down payment reduces the loan amount, which lowers P&I and total interest. If it brings LTV to 80 percent or below, it also removes PMI from the estimate entirely.

Extra principal. Adding $250 per month to the $300,000 loan at 6.5 percent leaves the scheduled payment unchanged but, based on the schedule, pays it off in about 21 years 10 months instead of 30 years, saving an estimated $120,300 of interest and about 8 years 2 months.

The calculator applies extra principal from the first payment onward and never re-amortizes, so the scheduled payment stays the same and the loan simply ends sooner.

What the calculator can and cannot tell you

It can show you how a change in one input flows through to the monthly payment, the payoff date and the lifetime totals, and it can show two scenarios next to each other so the trade-off is visible. It uses the same integer-cent arithmetic a lender statement would, rounding each month's interest before applying it and adjusting the final payment by a few cents so the balance ends at exactly zero.

It cannot tell you what rate you will be offered, what a lender will charge for PMI, or how your taxes and insurance will change. It does not include closing costs, points, maintenance, utilities or any tax benefits, and it does not adjust for inflation. It models a fixed-rate loan with one on-time payment per month, so bi-weekly plans, adjustable rates and missed payments fall outside it. Which loan is right for you depends on your budget, how long you plan to stay and factors the calculator cannot see.

Common mistakes

• Comparing P&I to a rent payment. Rent is the whole cost; P&I leaves out taxes, insurance, PMI and HOA. Compare the total monthly housing payment instead.
• Assuming the payment never changes. On a fixed-rate loan the P&I does not, but the escrow portion usually rises over time.
• Forgetting that PMI ends. A payment that includes PMI overstates what you will pay after the balance reaches the removal threshold. The calculator shows both figures.
• Reading total interest as money lost. It is the cost of borrowing over the full term. Selling or refinancing earlier changes it, and the calculator cannot know your plans.
• Treating the estimate as a quote. Rates, PMI and escrow amounts vary by lender, location and time. Use the calculator to understand trade-offs, then confirm the actual numbers with the loan estimate you receive.

Principal and interest (P&I)

The fixed part of a mortgage payment: interest on the remaining balance plus the amount that reduces it.

Total monthly housing payment

P&I plus PMI, property tax, homeowner's insurance and HOA dues; the calculator's headline figure.

Loan-to-value (LTV)

The loan amount divided by the home price, expressed as a percentage. PMI is estimated when LTV is above 80 percent.

Private mortgage insurance (PMI)

Insurance that protects the lender on low-down-payment loans; in the calculator it ends once the scheduled balance reaches 78 percent of the original price.

Escrow account

An account the lender uses to collect monthly amounts for property taxes and insurance and pay those bills when they come due.

Amortization

The schedule that splits each payment between interest and principal until the balance reaches zero.

Try it

Enter a price, down payment, rate and term, then add your best guesses for taxes, insurance and HOA to see an estimated total monthly housing payment. Use the comparison view to test a shorter term, a lower rate, a bigger down payment or an additional monthly payment and watch how the estimated interest and payoff date respond.