Mortgage Calculator

How Mortgage Payments Work

The number a mortgage calculator gives you is usually only part of what leaves your bank account each month. Understanding which part is the difference between a budget that holds and one that surprises you in the first year.

PITI — the four standard components

Principal and interest are fixed on a fixed-rate loan. Taxes and insurance are not, which is why an escrowed payment can rise even on a "fixed" mortgage. An annual escrow analysis reconciles what was collected against what was actually paid, and a shortfall shows up as a higher monthly figure.

The parts calculators commonly omit

• PMI (private mortgage insurance) — generally required on conventional loans with less than 20% down. It protects the lender, not you, and typically ends once you reach sufficient equity, though the rules differ by loan type. FHA loans carry their own mortgage insurance with different, often longer-lasting, terms.
• HOA dues — not part of your mortgage, but they leave the same account, and in some communities they exceed the tax portion.
• Closing costs — commonly a few percent of the purchase price, paid up front rather than monthly.
• Maintenance — the cost that ends most first-year budgets. A common rule of thumb is around 1% of the home's value annually, and rules of thumb are exactly as reliable as they sound.

Amortisation: why early payments barely touch the balance

On a fixed-rate loan your payment stays the same, but its composition shifts. Interest is charged on the outstanding balance, so at the start — when the balance is at its largest — interest takes the great majority of each payment and very little goes to principal.

On a 30-year loan at typical rates, the early years are overwhelmingly interest, the crossover to majority-principal arrives surprisingly late, and the final years are almost entirely principal. Nothing is wrong when your balance has barely moved after two years; that is the mathematics working as designed.

Two consequences follow, and they are the useful ones:

• Extra payments early are worth far more than extra payments late, because they remove principal that would otherwise accrue interest for decades. This is what the extra-payments calculator on the home page is showing you.
• A shorter term costs more monthly and much less overall. A 15-year loan usually carries a lower rate and dramatically less total interest, at the price of a higher and less flexible monthly commitment.

Fixed versus adjustable

A fixed-rate loan holds its rate for the full term, so principal and interest never change. An adjustable-rate mortgage (ARM) offers a lower rate for an initial period, then adjusts periodically against an index, within caps set in your loan documents. The relevant question is not which is cheaper today — it is what happens to your budget at the maximum the caps allow, and whether you can absorb it. If the answer depends on refinancing or selling before the adjustment, that is a plan with a dependency on future conditions nobody can promise.