Explain it like I’m 5
A mortgage is a big loan to buy a home. You pay it back a little every month for many years — often 30.
Each payment does two jobs: part pays the bank’s fee for lending you money (interest), and part pays back the money itself (principal). At first, most of it is fee. Over the years, more and more goes to paying off the loan — that slow shift is called amortization.
On top of that, your payment often includes the town’s property tax and insurance for the house. Put down less than 20% and there’s usually a little extra called PMI, too.
Words you’ll see, in plain English
- Mortgage
- A loan to buy a home. You pay it back a little every month for many years, and the home is the bank’s guarantee that you will.
- Principal
- The money you put in at the start, before any interest is added.
- Interest
- Money someone pays you for letting them use your money — or money you pay to borrow someone else’s.
- Amortization
- Paying off a loan bit by bit with equal monthly payments. Early payments are mostly interest; later ones are mostly paying down what you owe.
- Down payment
- The cash you pay up front when you buy a home. The bank lends you the rest. Put $60,000 down on a $300,000 home and you borrow $240,000.
- PMI (private mortgage insurance)
- An extra monthly charge on many home loans when you put down less than 20%. It protects the lender, not you, and usually goes away once you own 20% of the home.
- Property tax
- A yearly tax your town or county charges on the value of your home. It’s often around 1% of the value, but varies a lot by place, and many lenders collect it with your mortgage payment.
More money words explained simply in our glossary.
How to use the mortgage calculator
- Enter the home price and your down payment. The calculator works out the loan.
- Enter the interest rate and loan length.
- Add property tax, insurance and HOA fees for the full monthly cost. PMI is added only if you put down less than 20%.
- Try an extra monthly payment to see how much sooner you’d be debt-free and how much interest you’d save.
Not sure what price to aim for? Start with the house affordability calculator.
The mortgage payment formula
Payment = loan × r ÷ (1 − (1 + r)−n)
where r = yearly rate ÷ 12 and n = number of monthly payments.
Example: a $400,000 home with $80,000 (20%) down, 6.5% for 30 years.
- Loan: $400,000 − $80,000 = $320,000. r = 0.065 ÷ 12 ≈ 0.005417, n = 360.
- Principal and interest: $2,022.62 a month.
- Property tax at 1.1%: $366.67. Insurance: $150.00. Full payment: $2,539.28.
- Total interest over 30 years: $408,142. Paying $200 a month extra cuts that to $302,714 and finishes in 23 years 5 months.
Monthly payment per $100,000 borrowed
Principal and interest only.
| Rate | 30-year | 15-year |
|---|---|---|
| 5% | $536.82 | $790.79 |
| 5.5% | $567.79 | $817.08 |
| 6% | $599.55 | $843.86 |
| 6.5% | $632.07 | $871.11 |
| 7% | $665.30 | $898.83 |
| 7.5% | $699.21 | $927.01 |
| 8% | $733.76 | $955.65 |
For a $350,000 loan, multiply by 3.5.
15-year vs. 30-year mortgage
| $320,000 at 6.5% | 30-year | 15-year |
|---|---|---|
| Principal & interest | $2,022.62 | $2,787.54 |
| Total interest | $408,142 | $181,758 |
15-year rates are usually a bit lower than 30-year rates too, which widens the gap further.
More mortgage tools and guides
- How to pay off your mortgage early
- What is PMI?
- Mortgage recast calculator and recast vs. refinance
- Cash-out refinance calculator
Common mistakes
- Budgeting for principal and interest only. Tax and insurance can add 20% to 40% to the payment.
- Comparing lenders by rate alone. Compare the APR and closing costs on each Loan Estimate.
- Forgetting tax and insurance rise over time, even with a fixed-rate loan.
- Not marking extra payments “principal only”.
Learn more
- 15-Year vs. 30-Year Mortgage: Which Should You Choose? — A 15-year mortgage has a higher payment but a lower rate and far less interest. A 30-year mortgage has a lower, more flexible payment. On a $320,000 loan the 15-year can save around $250,000 in interest. Here’s how to decide.
- How Mortgage Amortization Works — Your mortgage payment stays the same every month, but what it pays for changes. Early on, most of it is interest; by the end, almost all of it pays down the loan. Here’s why, with a real schedule.
- How to Pay Off Your Mortgage Early — Small extra payments go straight to your loan balance and can cut years off a mortgage. On a $300,000 loan at 6.5%, an extra $200 a month saves over $100,000 in interest. Here’s how each method works.
Frequently asked questions
How is a mortgage payment calculated?
Monthly payment = loan × r ÷ (1 − (1 + r)^−n), where r is the yearly rate divided by 12 and n is the number of monthly payments. A $320,000 loan at 6.5% for 30 years: r = 0.065 ÷ 12 and n = 360, giving $2,022.62 a month for principal and interest.
What is included in a mortgage payment?
Usually four things, often called PITI: principal (paying back the loan), interest, property tax and homeowners insurance. Many lenders collect tax and insurance in an escrow account. PMI (if you put down less than 20%) and HOA fees can add more.
How much is the payment on a $300,000 mortgage?
At 6.5% for 30 years, principal and interest are about $1,896.20 a month. Add property tax, insurance and any PMI or HOA fees for the full payment — often several hundred dollars more.
Is a 15-year or 30-year mortgage better?
A 15-year loan has a higher payment but costs far less interest, and usually gets a lower rate too. In the example above at the same 6.5% rate, the 15-year payment is $2,788 a month instead of $2,023, but total interest drops from $408,142 to $181,758. A 30-year loan with extra payments when you can afford them is a flexible middle path.
Why does so little of my early payment go to principal?
Interest is charged on what you still owe, which is highest at the start. In the first month of a $320,000 loan at 6.5%, $1,733.33 of the $2,022.62 payment is interest and only $289.28 pays down the loan. The split shifts toward principal every month.
How can I lower my mortgage payment?
Put more down (and reach 20% to avoid PMI), improve your credit score for a better rate, choose a cheaper home or a longer term, shop several lenders, or later recast or refinance. Appealing your property tax assessment or shopping for insurance can also help.
These results are estimates for education only, based on the assumptions you enter. They are not financial, investment or tax advice. Real returns, rates and taxes vary. See our methodology anddisclaimer.