The True Cost of Your Mortgage
A mortgage is likely the largest financial commitment you'll ever make. On a typical $400,000 home purchased at 7% interest, you'll pay over $550,000 in interest alone over 30 years. Understanding mortgage mechanics isn't optional—it's essential for avoiding hundreds of thousands in unnecessary costs.
The Hidden Cost
This calculator breaks down your monthly payment into its components, shows how interest accrues over time, and demonstrates the powerful impact of extra payments.
Understanding Your Monthly Payment (PITI)
Your mortgage payment consists of four components, commonly abbreviated asPITI:
| Component | What It Covers | Typical % of Payment |
|---|---|---|
| Principal | Reduces your loan balance | 20-40% (grows over time) |
| Interest | Cost of borrowing | 60-80% initially (shrinks over time) |
| Taxes | Property taxes (escrowed) | 10-20% (varies by location) |
| Insurance | Homeowner's insurance + PMI if applicable | 5-15% |
The Amortization Shift
Sensitivity Analysis: Rate Impact
Small rate differences create enormous cost differences over 30 years:
| Interest Rate | Monthly P&I | Total Interest (30 yr) | vs. 6% Rate |
|---|---|---|---|
| 6.0% | $2,398 | $463,400 | Baseline |
| 6.5% | $2,528 | $510,000 | +$46,600 |
| 7.0% | $2,661 | $558,000 | +$94,600 |
| 7.5% | $2,797 | $607,000 | +$143,600 |
| 8.0% | $2,935 | $657,000 | +$193,600 |
Based on $400,000 loan amount
A 2% rate difference costs nearly $200,000 extra over the loan life. This is why credit score improvement before applying, rate shopping, and buying points (when appropriate) are worth significant attention.
The Mortgage Payment Formula
Your monthly principal and interest payment is calculated using the following formula (derived from the time value of money):
Mortgage Payment Formula
Where:
M = Monthly payment (P&I only)
P = Principal (loan amount)
r = Monthly interest rate (annual rate ÷ 12)
n = Total number of payments (years × 12)
Example: $400,000 loan at 7% for 30 years:
r = 0.07 ÷ 12 = 0.00583
n = 30 × 12 = 360
M = $400,000 × [0.00583(1.00583)360] / [(1.00583)360 - 1] = $2,661.21
15-Year vs. 30-Year Analysis
The loan term dramatically affects both payment and total cost:
| Factor | 15-Year at 6.5% | 30-Year at 7% | Difference |
|---|---|---|---|
| Monthly P&I | $3,484 | $2,661 | +$823/month |
| Total Interest | $227,100 | $558,000 | $330,900 saved |
| Equity at Year 5 | $96,000 | $28,000 | 3.4× faster equity |
| Payoff Date | Year 15 | Year 30 | 15 years sooner |
Based on $400,000 loan amount
The Hybrid Approach
Understanding PMI
Private Mortgage Insurance (PMI) is required when your down payment is below 20%. It protects the lender (not you) if you default.
| Down Payment | Loan Amount | Approx. Annual PMI | Monthly PMI |
|---|---|---|---|
| 5% ($25,000) | $475,000 | $4,750 (1%) | $396 |
| 10% ($50,000) | $450,000 | $3,375 (0.75%) | $281 |
| 15% ($75,000) | $425,000 | $2,125 (0.5%) | $177 |
| 20% ($100,000) | $400,000 | $0 | $0 |
Based on $500,000 home purchase, varying PMI rates by LTV
PMI Adds Up
Removing PMI
- Request cancellation when you reach 20% equity through payments
- Get a new appraisal if home appreciation pushed you to 20%+
- Automatic removal required by law at 22% equity (from payments, not appreciation)
- Refinance if rates have dropped and you've built equity
The Power of Extra Payments
Extra principal payments reduce your balance faster, saving interest and shortening your term:
| Extra Payment Strategy | Interest Saved | Years Saved |
|---|---|---|
| +$100/month | $62,000 | 4 years |
| +$200/month | $110,000 | 7 years |
| +$500/month | $195,000 | 13 years |
| One extra payment/year | $89,000 | 5 years |
| Bi-weekly payments | $78,000 | 4.5 years |
Based on $400,000 loan at 7% for 30 years
Make It Automatic
Frequently Asked Questions
Q: What credit score do I need for a mortgage?
A: Conventional loans typically require 620+. FHA loans allow 580+ with 3.5% down (or 500+ with 10% down). For the best rates, aim for 740+. Each 20-point improvement can lower your rate by 0.125-0.25%.
Q: How much house can I afford?
A: Lenders use two ratios: front-end (housing costs ≤28% of gross income) and back-end (total debt ≤36-43% of gross income). Example: $100K income suggests max housing payment of ~$2,333/month and total debt of ~$3,600/month.
Q: Should I pay points to lower my rate?
A: Calculate the break-even period: divide point cost by monthly savings. If break-even is 4 years and you'll keep the home 10+ years, points make sense. Generally, 1 point (1% of loan) lowers rate by 0.25%. If you might move or refinance soon, skip points.
Q: What's the difference between APR and interest rate?
A: Interest rate is the cost of borrowing the principal. APR (Annual Percentage Rate) includes interest plus fees (origination, points, closing costs), giving you the true annual cost. Always compare APRs when shopping lenders.
Q: How much should I put down?
A: 20% avoids PMI and gets best rates. However, many buyers put down 3-10%. Consider: 3% (Conventional 97), 3.5% (FHA), 0% (VA/USDA). Lower down payments mean PMI but preserve cash for emergencies and investments.
Q: What is PMI and how do I remove it?
A: Private Mortgage Insurance protects the lender when you put less than 20% down. Cost: 0.5-1.5% of loan annually. Request removal when equity reaches 20% through payments or appreciation. Automatic removal required at 22% equity.
Q: Should I get a 15-year or 30-year mortgage?
A: 15-year has higher payments but dramatically lower total interest (often 50%+ savings). 30-year provides lower payments and more flexibility. Many advisors suggest 30-year with disciplined extra payments—you get flexibility with the option to pay faster.
Q: Can I pay off my mortgage early?
A: Most mortgages allow prepayment without penalty (verify in your loan documents). Extra payments go directly to principal, reducing interest over the loan life. Even $100-200/month extra can save tens of thousands and years off your loan.
This calculator provides estimates for educational purposes. Actual mortgage terms depend on creditworthiness, lender policies, property type, and market conditions. Property taxes and insurance costs vary by location and coverage. Consult with a licensed mortgage professional for personalized advice and accurate quotes.