How to Calculate Mortgage Payments (PITI Guide)

When you see a mortgage rate advertised at 6.5%, it’s easy to assume your monthly payment is just a simple math problem involving the loan amount and that percentage. But when you get your first bill, the number is often hundreds of dollars higher than expected.

The reason? Your mortgage payment is actually a bundle of four to five different costs, collectively known in the industry as PITI.

Understanding PITI is key to determining how much house you can actually afford. In this guide, we’ll break down the components of a mortgage payment, explain the mystery of PMI, and show you how amortization works over the life of your loan.

What is PITI?

PITI stands for Principal, Interest, Taxes, and Insurance. These are the four standard components of a monthly mortgage payment.

1. Principal

This is the portion of your payment that actually pays back the money you borrowed.

• Early years: You pay very little principal (sometimes only 10-15% of the payment).
• Later years: You pay mostly principal.
• Goal: To reduce your loan balance to zero.

2. Interest

This is the cost of borrowing money, paid to the lender.

• Calculation: Calculated monthly based on your remaining loan balance.
• Reality: In the first few years of a 30-year mortgage, interest can make up 70-80% of your total payment. This is front-loaded profit for the bank.

3. Taxes (Property Tax)

Real estate taxes assessed by your local government (county, city, school district).

• How it works: Your lender estimates your annual tax bill, divides it by 12, and collects that amount monthly. They hold it in an escrow account and pay the tax collector on your behalf when the bill is due.
• Fluctuation: Unlike your fixed principal and interest, taxes can (and usually do) go up over time, increasing your monthly payment.

4. Insurance (Homeowners Insurance)

Policy that covers damage to your home from fire, theft, wind, etc.

• Requirement: Lenders require this to protect their collateral (your house).
• Escrow: Like taxes, this is usually bundled into your monthly payment and paid out of escrow.

The “Hidden” Costs: PMI and HOA

Beyond PITI, two other factors can significantly inflate your monthly obligation.

PMI (Private Mortgage Insurance)

If you put down less than 20% of the home’s purchase price, lenders typically consider you a higher risk. To mitigate this, they require you to pay for PMI.

• Cost: Typically 0.5% to 1% of the loan amount per year. On a $400,000 loan, that’s $166–$333 extra per month.
• Benefit: It protects the lender, not you.
• Removal: For conventional loans, PMI automatically terminates when your loan-to-value (LTV) ratio drops to 78%.

HOA Fees (Homeowners Association)

If you buy a condo, townhome, or house in a planned community, you likely have monthly HOA dues.

• Payment: These are usually paid separately from your mortgage to the association directly, but lenders factor them into your debt-to-income ratio when approving you.
• Impact: A $300/month HOA fee reduces your purchasing power by roughly $40,000–$50,000.

Understanding Amortization

Amortization is the schedule of payments that pays off your loan over time. The most important concept to grasp is the Principal-Interest shift.

Imagine a $400,000 loan at 6.5% interest for 30 years.

• Total Payment: ~$2,528 (Principal + Interest only).

Year	Interest Paid	Principal Paid	Balance Remaining
Year 1	$25,900	$4,400	$395,600
Year 15	$17,800	$12,500	$268,000
Year 29	$1,800	$28,500	$28,000

Notice that in Year 1, 85% of your money goes to interest. You barely make a dent in the debt. By Year 29, it flips: almost all your money goes to principal.

The Power of Extra Payments

Because interest is calculated on your current balance, anything you do to lower that balance faster has a snowball effect.

Using the same example ($400k at 6.5%), if you pay just $100 extra per month:

1. Your principal balance drops faster.
2. Next month’s interest charge is slightly lower.
3. More of your regular payment goes to principal.
4. Repeat.

Result: You save over $68,000 in interest and pay off your home 4 years early.

How to Calculate It Yourself

While the math for PITI is complex, you can estimate it manually:

1. Principal & Interest: Use our Mortgage Calculator (the formula is complex: M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1 ]).
2. Taxes: Take the home’s annual tax bill (from the listing or county records) and divide by 12.
3. Insurance: Estimate $1,200/year for an average home (divide by 12 = $100/mo).
4. PMI: If putting <20% down, add ~0.5% of the loan amount divided by 12.

Summary

• PITI (Principal, Interest, Taxes, Insurance) makes up your core payment.
• Taxes and Insurance are usually held in escrow and can rise over time.
• PMI is an extra fee for low down payments (under 20%).
• Amortization means you pay mostly interest at first, mostly principal later.
• Extra payments go 100% to principal and offer a guaranteed return on investment.

Before making an offer on a home, always run the numbers through a complete PITI calculator to ensure the monthly obligation fits comfortably within your budget, not just the bank’s approval limit.

Frequently Asked Questions

What percentage of my income should go toward mortgage payments?

The standard guideline is the 28/36 rule: your total housing payment (principal, interest, taxes, and insurance) shouldn’t exceed 28% of your gross monthly income, and total debt payments should stay under 36%. For example, on a $6,000 monthly gross income, aim for a maximum housing payment of $1,680. Stretching beyond these limits increases the risk of becoming house-poor, where you own a home but have little financial flexibility for emergencies or other goals.

When can I stop paying PMI on my mortgage?

For conventional loans, PMI automatically terminates when your loan-to-value ratio reaches 78% of the original purchase price (meaning you have 22% equity). You can also request cancellation at 80% LTV, but you may need to pay for an appraisal to prove your home value. FHA loans are different: if you put less than 10% down, mortgage insurance premiums last the entire life of the loan. The only way to remove FHA mortgage insurance is to refinance into a conventional loan once you have sufficient equity.

How much does an extra $100 per month save on a 30-year mortgage?

On a $400,000 mortgage at 6.5%, paying an extra $100 per month saves approximately $68,000 in total interest and pays off the loan roughly 4 years early. The savings are so large because extra payments reduce the principal balance, which lowers the interest charged on every subsequent payment. The earlier you start making extra payments, the greater the compounding benefit over the remaining life of the loan.

Why does so much of my early payment go to interest?

Mortgage interest is calculated on the remaining balance each month. In the first year of a $400,000 loan at 6.5%, your outstanding balance is near its maximum, so interest charges are at their highest. As you gradually pay down the principal over the years, the interest portion shrinks and the principal portion grows. This front-loading of interest is an inherent feature of amortized loans and is the primary reason lenders profit most in the early years of your mortgage.