Mortgage Calculator Explained: Principal, Interest, Taxes & More
What Is a Mortgage?
A mortgage is a loan used to purchase real estate, secured by the property itself. If you stop making payments, the lender can foreclose — take possession of the property. Mortgages typically span 15 or 30 years, and you pay back the amount borrowed (principal) plus interest over that term.
The PITI of Mortgage Payments
Your monthly mortgage payment usually consists of four components, often called PITI:
- P — Principal: The portion that reduces your loan balance
- I — Interest: The lender's fee for providing the loan
- T — Taxes: Property taxes, escrowed monthly (1/12 of annual tax bill)
- I — Insurance: Homeowners insurance, escrowed monthly
If you put less than 20% down, you also pay PMI (Private Mortgage Insurance), adding to the monthly total.
How Mortgage Payments Are Calculated
The monthly principal + interest payment uses the amortization formula:
M = P × [r(1+r)^n] ÷ [(1+r)^n − 1]
- M = Monthly payment
- P = Loan amount (principal)
- r = Monthly interest rate (annual rate ÷ 12)
- n = Total number of payments (loan term in years × 12)
Example: $300,000 loan at 7% for 30 years.
r = 0.07 ÷ 12 = 0.005833 | n = 360
M = $300,000 × [0.005833 × (1.005833)^360] ÷ [(1.005833)^360 − 1]
M ≈ $1,995.91/month
Amortization: How Payments Split Over Time
In the early years, most of your payment goes to interest. As the loan balance decreases, more goes to principal. This is amortization:
| Year | Monthly Payment | Principal Portion | Interest Portion |
|---|---|---|---|
| Year 1 | $1,996 | ~$246 | ~$1,750 |
| Year 10 | $1,996 | ~$440 | ~$1,556 |
| Year 20 | $1,996 | ~$795 | ~$1,201 |
| Year 30 | $1,996 | ~$1,984 | ~$12 |
30-Year vs. 15-Year Mortgage
| 30-Year Mortgage | 15-Year Mortgage | |
|---|---|---|
| Monthly payment ($300k at 7%) | ~$1,996 | ~$2,696 |
| Total interest paid | ~$418,600 | ~$185,400 |
| Interest saved | — | ~$233,200 |
The 15-year pays ~$700 more per month but saves over $233,000 in total interest and builds equity much faster.
Extra Payments: A Powerful Strategy
Making one extra mortgage payment per year (applied to principal) on a 30-year mortgage can shave 4–7 years off the loan and save tens of thousands in interest. Even paying $100 extra per month makes a significant difference over time.
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