Your monthly mortgage payment does a lot more than repay what you borrowed to buy your home. It includes interest and often taxes and insurance, so knowing how it all comes together will help you understand how much you’re paying, what you get for your payment, and what you can afford.
What Is A Mortgage Payment?
A mortgage payment is an amount paid, usually monthly, to your lender. How much you have to pay depends on several factors. It will always include a payment toward your loan principal and interest. It also may include payments into an escrow account to cover property taxes and insurance premiums. Some borrowers pay their mortgage biweekly instead of monthly, often allowing them to repay their loan more quickly.
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What Is Included In A Mortgage Payment?
The elements of a mortgage payment are often summed up with the term “PITI,” an acronym for principal, interest, taxes and insurance.
Principal
A portion of your payment is applied to the principal, the amount you borrowed to buy your home. Your mortgage payments are amortized over your loan term – typically 15 or 30 years. When you start paying your mortgage, a small amount of your loan payment goes to the principal and most of it goes to interest. Over time, the amount applied to the principal increases and the amount applied to interest decreases until the final payment reduces your principal to zero.
Interest
Interest is what you pay your lender to borrow the principal. It’s expressed as a percentage and can be fixed for the entire loan term or adjusted periodically after a fixed introductory term. Your loan payments will begin as mostly interest, with the amount you pay toward interest reducing with each payment. You may be able to claim a mortgage interest deduction on your federal income taxes to offset the interest you owe each year.
Taxes
Most state, county and municipal governments levy property taxes and use the revenues to fund public schools, trash collection, police, firefighters and roads. Property owners must pay property taxes, usually once or twice a year. The amount you pay is based on your property value, which can change from year to year. Several factors determine the actual amount you pay, including the assessed value of your home and local tax rates. Typically, every county has its own taxation system.
Most homeowners use an escrow account established by their mortgage lender to pay property taxes. The lender estimates the annual tax bill for the property and adds a monthly amount to your mortgage payment to cover it. When the bill comes due, your lender will use the money in the escrow account to pay the property tax bill on your behalf. If the bill is less than the amount collected in escrow, you’ll be refunded the difference. If the bill exceeds the collected amount, you’ll have to pay the difference when the tax bill is due.
Insurance
There are two main types of insurance that can be added to your mortgage payment:
- Homeowners insurance: Homeowners insurance protects you against financial loss if your home is damaged or if there’s an accident on your property. It typically covers the cost of restoring the property to its value before the damage or accident.
- Mortgage insurance: Mortgage insurance protects the lender against losses if you default on your loan. You must pay private mortgage insurance if you have a conventional loan and your down payment is less than 20%. You can stop paying for PMI when you have more than 20% equity in your home. If you have a loan backed by the Federal Housing Administration, you will have to pay a mortgage insurance premium both when you buy the home and with each monthly payment for at least 11 years, depending on how much of a down payment you made.
Your homeowners insurance premium is paid into an escrow account, the same as property taxes. Mortgage insurance premiums are simply added to your monthly mortgage payment.
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How Mortgage Payments Work
Now that you know what goes into each payment, it’s time to start paying off your mortgage.
When To Pay
After completing the mortgage loan process, your first mortgage payment will be due the first full month after closing. For example, if you close on June 9, your closing costs will cover the interest you would accrue for the rest of June. After that, your payment for July will be due on Aug. 1.
How Much To Pay
Keep in mind that mortgage payments can change. The amount you pay for taxes and insurance may change from year to year. The same is true if you have an ARM. Your lender will provide print or electronic statements that break down your statement and tell you how much to pay and when.
How To Make A Payment
You can pay your mortgage by mail, phone or online. If you set up an automatic payment through your lender, your payment amount will never be insufficient, and you can rest assured knowing you’re not overpaying when your escrow amount or interest rate goes down.
Making Extra Payments
Extra payments toward your mortgage principal can save you thousands of dollars in the long run. Whether you pay a little extra every month or make an additional payment during the year, the total interest you pay is reduced, and you may be able to pay off your mortgage early. It also makes sense to pay extra if your main goal is to build equity. But before you start making additional payments, check with your lender to find out if your loan has a prepayment penalty clause.
Removing PMI
PMI can be canceled once your home’s loan-to-value ratio falls below 80%. The LTV ratio compares how much you owe on your home with your home’s current market value. By law, PMI must be removed once a home’s LTV ratio reaches 78% based on the original payment schedule at closing.
Missing Payments
You typically won’t pay a penalty if you’re only a few days late paying your mortgage. Most lenders provide a grace period, allowing borrowers to make a late payment without paying a fee. Most grace periods are around 15 days, but you should verify this with your lender.
It’s important to contact your lender if you think you might miss a mortgage payment. Waiting to resolve the issue may lead to defaulting on your loan. You could face late payment fees, penalties and a drop in your credit score, which you’ll need to repair before applying for future loans. Falling behind on your payments can also lead to possible legal action and foreclosure.
Your lender may be able to offer options to help you get back on track with your mortgage payments.
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Using A Mortgage Calculator For Your Monthly Payment Breakdown
Calculating a mortgage payment can be tricky. A mortgage calculator is the best way to estimate what you’ll owe each month. It can also be a great way to assess how your down payment will affect your monthly payments, which may help you decide how much to put down.
Here’s what you’ll need to get started:
- The home’s price
- The down payment amount
- The loan’s term
- The interest rate
- Annual taxes
- Annual insurance
- Monthly homeowners association fees
How To Calculate Mortgage Payments With A Formula
If you prefer to calculate mortgage payments manually, you can use the following formula:
M = P [ I(1 + I)N ] / [ (1 + I)N − 1]
- M = The monthly payment amount that you’re solving for.
- P = The principal amount, or loan balance, that you’re trying to pay off.
- I = The interest rate you’ll pay. Note that because the mortgage interest rate is an annual rate that is paid over a year, you need to divide this number by 12 to get the monthly interest rate amount.
- N = The total number of payments in your loan term. For example, if you have a 30-year mortgage with monthly payments, there are 360 payments.
Once you understand the formula, you can experiment with different payment scenarios, such as adding in taxes and insurance.
The Bottom Line
Paying a mortgage is a huge commitment, so there’s no such thing as being too prepared. Knowing what goes into a mortgage and how you’ll manage the payments will better prepare you for the future as you figure out how much you can afford on a house.
Tai Le
Tai Le is a longtime member of the editorial team at Quicken Loans, focused on supporting home buyers and homeowners as they navigate the process of getting a mortgage and refinancing. He works closely with experts to create relevant content for people seeking reliable financial information. Originally from Long Beach, California, Tai lived in Miami for many years before purchasing a home with his wife in the Tampa Bay area of Florida, which gave him a firsthand understanding of the challenges and decisions involved in the home buying journey. With extensive experience in personal finance, insurance and travel, Tai has also helped build notable brands like Carnival Cruise Line and LowerMyBills.
