Mortgage Calculator Explained: Principal, Interest, Taxes & Insurance

Throughout this guide we use the same base example: a $400,000 home, a 20% down payment of $80,000, a 30-year fixed mortgage at 6.5% interest, $6,000 a year in property taxes, $1,500 a year in homeowner’s insurance, and no HOA fees.

You can plug these exact numbers into the Mortgage Calculator to follow along. The total monthly payment at these inputs lands at roughly $2,647. Where does that figure come from? That is what the rest of this guide explains.

Principal is the part of each payment that chips away at the amount you borrowed. In our example, you are borrowing $320,000 ($400,000 − $80,000 down payment).

On the very first monthly payment, only about $289 of your $2,023 principal-and-interest instalment actually reduces the principal — the rest is interest. By year 15, that same $2,023 is split roughly 50/50 between principal and interest. By the last year of the loan, almost all of it is principal.

This front-loading of interest is the single most important quirk of a fixed mortgage. It is why paying extra against principal in the early years has an outsized effect.

Monthly interest is computed on the remaining balance using 1/12th of the annual rate. For our $320,000 at 6.5%, the first month’s interest is 320,000 × (0.065 / 12) ≈ $1,733.

Over a 30-year term at 6.5%, a borrower will pay approximately $408,000 in interest alone — more than the original loan amount. Cutting the term to 15 years or the rate by a full point dramatically reduces this. Even a 0.25% lower rate on our example saves close to $20,000 over the life of the loan.

Property taxes are collected by local government, not the lender. But most mortgages “escrow” them: the lender collects 1/12th of the annual bill every month, holds it in an escrow account, and pays the bill on your behalf.

In our example, $6,000 a year in tax translates to $500 a month added onto the mortgage payment. Property tax rates vary wildly by location — from under 0.4% in Hawaii to over 2% in parts of the Midwest and Northeast — so always check your local rate before budgeting.

Homeowner’s insurance protects you if the house burns down, gets broken into, or is damaged by a covered event. Lenders require it, and like property taxes, it is usually escrowed. Our $1,500/year example adds $125 a month.

PMI, or private mortgage insurance, is a separate beast. Lenders require it whenever your down payment is below 20%, because a smaller equity cushion means more risk for them. It usually costs 0.3–1.5% of the loan amount annually.

The silver lining: PMI is not forever. Once your loan-to-value ratio falls below 80% — through payments, appreciation, or a combination — you can request that it be dropped, saving $100–$300+ a month on many loans.

For our running example with a 20% down payment (so no PMI) and no HOA: $2,023 P&I + $500 tax + $125 insurance = $2,648 per month.

If the down payment were only 5% ($20,000), the loan would be $380,000, P&I would rise to $2,401, and PMI at 0.7% would add another $222 a month — pushing the total close to $3,248. That is a $600-a-month difference, driven almost entirely by the down payment decision.

This is why the Mortgage Calculator on this site lets you toggle down payment between a dollar amount and a percentage — comparing the two scenarios side-by-side is the single most useful thing you can do before going house-shopping.

The 28/36 rule: keep your housing payment under 28% of gross monthly income and total debts (housing + car + student loans + minimum credit card payments) under 36%.

The one-third rule for savings: try to have enough saved for three months of the full PITI payment before you close. Emergencies happen.

The extra-payment rule: one additional principal payment a year can shave 4–7 years off a 30-year mortgage, depending on rate. Small, consistent, and ruthlessly effective.