How a Mortgage Payment Is Calculated: Principal, Interest, Taxes, Insurance and PMI Explained

Last reviewed October 8, 2026. The conforming loan limit comes from the FHFA, and the PMI rules from the Consumer Financial Protection Bureau. Examples are our own calculations. Sources are at the end.

When you apply for a mortgage, the lender shows you a monthly payment. It usually includes much more than the loan itself, and a lot of buyers are surprised by the difference between the number they calculated and the one on the paperwork. This guide builds the payment from the ground up with one worked example, so you can see where every dollar goes. You can try your own numbers in the mortgage calculator.

The four parts of a typical payment: PITI

Lenders often describe a mortgage payment as PITI:

P: Principal. The part that repays the loan.
I: Interest. The cost of borrowing.
T: Property taxes. Often collected monthly by the lender and paid for you from an escrow account.
I: Insurance. Homeowners insurance, and mortgage insurance if required.

Some borrowers also pay homeowners association (HOA) dues, which sit outside the loan.

The principal and interest formula

For a fixed-rate loan, the monthly principal and interest payment is:

Payment = L × r × (1 + r)^n ÷ ((1 + r)^n − 1)

where L is the loan amount, r is the monthly interest rate (the annual rate divided by 12) and n is the number of payments. We explain where this comes from in how loan payments are calculated.

A worked example

Suppose you buy a home for $400,000 with a 20% down payment of $80,000, so the loan is $320,000. The rate is 6.5% for 30 years. These numbers are illustrations, not current market rates.

Principal and interest:

r = 0.065 ÷ 12 ≈ 0.005417, n = 360
Payment ≈ $2,022.62 a month

Over 30 years you would pay about $728,100 in total, which means about $408,100 in interest, more than the loan itself.

Add taxes and insurance (estimates):

Property tax at 1.1% of the home value a year: 400,000 × 1.1% ÷ 12 ≈ $366.67 a month
Homeowners insurance of $1,500 a year: $125 a month

Total PITI ≈ 2,022.62 + 366.67 + 125 = $2,514.28 a month.

Property tax rates and insurance prices vary widely by location, so replace these with local quotes.

Why the first years are mostly interest

In month one of this loan, the interest is 320,000 × 0.065 ÷ 12 = $1,733.33. Of the $2,022.62 principal-and-interest payment, only $289.28 reduces the loan. After five years of payments, you still owe about $299,555. You have paid down only about $20,400 of principal even though you have made $121,400 of payments.

That is why selling a home in the first few years often returns less than people expect, once selling costs are taken out.

Down payment and PMI

If you put down less than 20%, many lenders require private mortgage insurance (PMI) on conventional loans. It protects the lender, not you, and adds to the monthly cost.

Example: put down 10% ($40,000) on the same $400,000 home.

Loan: $360,000
Principal and interest at 6.5%: about $2,275.44 a month, which is $252.83 more than the 20% down case
PMI: premiums vary by credit score and loan details. If it were 0.5% of the loan per year, that is 360,000 × 0.5% ÷ 12 = $150 a month

So 10% down could add roughly $400 a month to the payment compared with 20% down, before taxes and insurance, though PMI premiums differ.

When PMI ends

Under the Homeowners Protection Act, as explained by the CFPB:

You can ask your servicer in writing to cancel PMI when your loan balance is scheduled to reach 80% of the home's original value (or sooner if you pay down the balance to that level), if you have a good payment history and meet other conditions.
The servicer must automatically terminate PMI when your balance is scheduled to reach 78% of the original value, as long as you are current on payments.
There is also a backstop: PMI must end the month after the midpoint of the loan's schedule (15 years for a 30-year loan), if you are current.

Government-backed loans such as FHA loans have their own mortgage insurance rules, which can be different and sometimes last longer.

15 years or 30 years?

Take the same $320,000 at 6.5%, but over 15 years:

Payment ≈ $2,787.54 a month, about $765 more
Total interest ≈ $181,758, compared with $408,142 for the 30-year loan

You save about $226,000 in interest for about $765 more per month. A shorter term is the biggest single lever on cost, but the payment must fit your budget comfortably. Many buyers choose 30 years for the flexibility and make extra payments when they can.

The loan limit

For most loans backed by Fannie Mae and Freddie Mac, there is a conforming loan limit. For 2026, the baseline limit for a one-unit property in most of the US is $832,750, up from $806,500 in 2025. In higher-cost areas the limit can be higher. Loans above the limit are called jumbo loans and are priced and underwritten differently.

Other costs to plan for

Closing costs. Lender fees, appraisal, title and other charges are often a few percent of the loan, but they vary. The lender's Loan Estimate lists them.
Maintenance and repairs. A common rule of thumb is to budget 1% or more of the home value each year.
Rate type. A fixed rate keeps principal and interest the same. An adjustable rate can change after an initial period.
Points. You can sometimes pay upfront to lower the rate. Compare the savings against the cost and how long you will keep the loan.

A checklist before you buy

Calculate PITI, not just principal and interest.
Compare payments at several down payment sizes, including PMI.
Check 15-year and 30-year options.
Get quotes for insurance and confirm local property tax.
Keep a cash reserve for repairs after closing.
Compare lenders using the Loan Estimate, looking at the APR and the total cost.
Do not stretch to the maximum the lender approves.

How we checked these numbers

We calculated every example with a script from the stated assumptions. The conforming loan limit is from the FHFA announcement, and the PMI rules follow the CFPB's explanation. Market rates, taxes and premiums change, so use current quotes.

This article is general information and an illustration of the arithmetic, not financial or legal advice.