What makes up a mortgage payment
Lenders often talk about PITI: principal, interest, taxes and insurance. Principal and interest repay the loan itself. Property tax and home insurance are usually collected by your lender each month and held in an escrow account. If you put down less than 20%, most conventional loans also add private mortgage insurance (PMI), and some homes come with HOA or service charges on top.
Example: a $400,000 home
With 20% down ($80,000), a $320,000 loan at 6.5% over 30 years, 1.1% property tax and $1,800 a year of insurance:
| Part of the payment | Per month |
|---|---|
| Principal and interest | $2,022.62 |
| Property tax | $366.67 |
| Home insurance | $150.00 |
| Total | $2,539.28 |
Over the full 30 years that loan costs about $408,000 in interest. Adding just $200 a month to the payment pays it off about 6 years and 7 months sooner and saves roughly $105,000.
15 year vs 30 year mortgage
A 15 year mortgage has a higher monthly payment but far less interest, and rates are usually a little lower too. On a $300,000 loan at 6.5%, the 30 year payment is about $1,896 and the 15 year payment about $2,613, but the 15 year loan saves over $212,000 in interest. A 30 year loan keeps the payment lower and gives you more room in your budget.
How to lower your mortgage payment
- Put down 20% or more to avoid PMI.
- Improve your credit score and shop several lenders for the best rate.
- Ask about property tax exemptions such as a homestead exemption where you live.
- Shop around for home insurance each year.
For car, personal or student loans, use the loan calculator. To see your take home pay, try the US paycheck, UK or Canada calculator.
Based on the standard fixed rate amortisation formula. The 28/36 guide is a common lending rule of thumb, not a rule every lender uses.
