Calculating mortgage payments

Learn how mortgage payments are broken down so you can make the smartest decisions when it comes to paying it off.

How to Calculate and Understand a Mortgage Payment

If your dream is to buy a home of your own, then chances are you’re going to need a mortgage to help finance that dream. A mortgage is a large loan that the borrower pays back over a long period of time. The most common type, especially for first-time home buyers, is the 30-year fixed conventional mortgage.

Breaking Down Mortgage Payments

This type of mortgage breaks down into three main elements: principal, interest, and property taxes. To calculate your monthly mortgage payment you must consider these three components.
Take a look at the chart below, which uses an example of a $250,000 home with a 20% down payment. This will give you an idea of where your monthly mortgage payment is going.
*Chart based on a 30-year loan of $200,000 with interest rate of 2.961% and property tax of 1.0%/year.

Principal

Principal on a mortgage is the original amount borrowed from the lender. This is the cost of the home minus your down payment. For example, if the home costs $250,000 and you make a down payment of 20% or $50,000, your principal loan amount will be $200,000.
When first making payments, the amount going towards principal is less. The lender collects more money on interest payments in the beginning years. Over time, this will reverse. Meaning the amount going towards interest will decrease and principal will increase.

Interest

Interest rates are quoted based on many factors. The interest is the amount the lender receives for taking on the risk of loaning you money. The percentage will vary based on factors you can control — such as credit score and a bigger down payment. But will also be influenced by things beyond your control like inflation and economic trends. Higher interest rates equal a bigger monthly mortgage payment.

Taxes

Property tax includes payments set by state and local governments. This funds public and government services like school districts, transportation, or emergency services. Taxes are due annually to governments. Your mortgage payment will include a monthly increment that goes toward the property tax.
How to Pay Off Mortgage Early
Many mortgages give the option of adding extra payments each month that go directly toward the principal. This is the best way to pay off a mortgage quickly because over time, it will reduce the total interest on your loan.
If you can, limit your spending in areas such as entertainment or eating at restaurants. Instead put that money towards your mortgage principal and you could potentially save thousands of dollars.

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