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Your monthly mortgage payment is made up of four main components, often called PITI: principal, interest, taxes, and insurance. Understanding each part helps you budget accurately and avoid surprises when buying a home.
The principal is the amount you borrow from your lender — the home price minus your down payment. Interest is what the lender charges you for borrowing that money. In the early years of your mortgage, most of your payment goes toward interest. Over time, more goes toward paying down the principal balance.
Property taxes are set by your local government and are based on the assessed value of your home. They typically range from 0.5% to 2.5% of your home's value per year, depending on where you live. Your lender usually collects property taxes as part of your monthly payment and pays them on your behalf through an escrow account.
Lenders require homeowners insurance to protect their investment. The average cost is roughly $1,200 to $2,400 per year, but it varies widely based on your home's location, size, and the coverage you choose. Like property taxes, insurance is often included in your monthly escrow payment.
If your down payment is less than 20% of the home price, most lenders require PMI. This typically costs between 0.5% and 1% of your loan amount per year. PMI protects the lender — not you — in case you default. The good news is that PMI can be removed once you reach 20% equity in your home.
Pro tip: Even a small reduction in your interest rate can save you tens of thousands of dollars over the life of a 30-year mortgage. Use the calculator above to see how different rates affect your total cost.
A common guideline is that your total monthly housing payment (including taxes and insurance) should not exceed 28% of your gross monthly income. This is known as the "front-end" debt-to-income ratio. Lenders also look at your "back-end" ratio, which includes all monthly debts, and generally prefer this to be below 36-43%.
A 15-year mortgage has higher monthly payments but saves you a significant amount in total interest. A 30-year mortgage gives you lower monthly payments and more flexibility in your budget. The right choice depends on your financial situation and goals. Use the calculator above to compare both options side by side.
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