How to Calculate Mortgage Payments

When you buy a home, looking at the listing price isn't enough to tell you if it fits into your monthly budget. You need to calculate the actual mortgage payment. While you can easily use an online calculator, understanding the math behind it can help you make better financial decisions.

The PITI Breakdown

Most conventional and government-backed loans require you to pay four main costs every single month, bundled together in an acronym known as PITI:

• P - Principal: The portion of the payment that pays down your actual loan balance.
• I - Interest: The fee the lender charges you to borrow the money.
• T - Taxes: Property taxes set by your local county. The lender collects this and puts it in an escrow account.
• I - Insurance: Homeowners insurance to protect against damage, plus Private Mortgage Insurance (PMI) if your down payment was less than 20%.

The Formula for Principal and Interest

If you want to calculate the core part of your mortgage (just the Principal and Interest) by hand, the standard mathematical formula is:

M = P [ i(1 + i)^n ] / [ (1 + i)^n - 1]

Where:
M = Total monthly payment
P = Principal loan amount
i = Monthly interest rate (annual rate divided by 12)
n = Number of months (e.g., 360 for a 30-year loan)

The Hidden Costs: Taxes and Insurance

Once you find out the Principal and Interest, do not assume that is your final checkout price! Property taxes can add hundreds of dollars to your monthly payment depending on your state.

Similarly, home insurance rates have been rising nationwide. Lastly, if you didn't put 20% down, PMI can cost between 0.5% and 1.5% of the total loan amount annually. All of these figures are divided by 12 and added to your base Principal and Interest payment.