How Mortgage Payments Are Calculated

What PITI Means

Lenders and real estate professionals use the acronym PITI to describe the four components of a full monthly mortgage payment:

• P — Principal: The portion of your payment that reduces the loan balance.
• I — Interest: The cost of borrowing, charged monthly on the remaining balance.
• T — Taxes: Property taxes, typically collected monthly and held in escrow by the lender until due.
• I — Insurance: Homeowner's insurance, and PMI (private mortgage insurance) if your down payment is less than 20%.

The amortization formula calculates only principal and interest (P+I). Taxes and insurance vary by location and lender and must be added separately to get your true monthly housing cost.

The Amortization Formula for Mortgages

A mortgage uses the same standard amortization formula as any fixed-rate loan:

For a $300,000 home loan at 6.5% for 30 years:

1. Monthly rate: 6.5% ÷ 12 = 0.5417% = 0.005417
2. Total payments: 30 × 12 = 360
3. Monthly P+I payment: $1,896.20
4. Total paid over 30 years: $682,632
5. Total interest paid: $382,632

The 30-Year vs. 15-Year Comparison

The choice between a 30-year and 15-year mortgage is one of the most consequential financial decisions in a home purchase. Using the same $300,000 at 6.5%:

The 15-year mortgage costs $717 more per month but saves $212,234 in total interest. The right choice depends on your cash flow, other financial priorities, and the interest rate differential between the two terms (15-year rates are typically 0.5–0.75% lower than 30-year rates).

What PMI Costs and When It Ends

Private mortgage insurance (PMI) is required by most lenders when the down payment is less than 20% of the purchase price. PMI protects the lender — not the borrower — against default.

PMI typically costs between 0.5% and 1.5% of the loan amount per year, charged monthly. On a $300,000 loan, that is $125–$375 per month added to your payment.

Under the Homeowners Protection Act (federal law), lenders must automatically cancel PMI when the loan balance reaches 78% of the original purchase price. You can request cancellation when the balance reaches 80%. This is a significant cost reduction worth tracking.

The Effect of Extra Payments

Making one extra monthly payment per year on a 30-year mortgage at 6.5% reduces the loan term by approximately 4–5 years and saves tens of thousands of dollars in interest. This is because extra payments reduce the principal directly, and all subsequent interest is charged on a smaller balance.

On the $300,000 example: one extra payment per year reduces total interest from $382,632 to approximately $315,000 — a saving of over $67,000.