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Six pieces of a house loan payment

A house payment is not one number. It is a stack of six charges your lender collects each month, and five of them can move even when the balance stays the same.

• Principal pays down what you borrowed. On a 30 year loan, the first year sends only a small slice of each check here.
• Interest is the lender's charge on the balance still outstanding. On $360,000 at 6.50 percent, the first month carries $1,950.00 of interest.
• Property tax is set by the county and billed once or twice a year. The lender divides it into 12 pieces.
• Home insurance protects the structure, and a standard policy runs $1,200 to $2,000 a year.
• Mortgage insurance appears when you put less than 20 percent down. It protects the lender, not you.
• HOA dues apply to condos and planned neighborhoods, and lenders count them against you.

The table holds every input steady except the price: 10 percent down, a 6.50 percent rate, 1.20 percent property tax, $1,500 of insurance and 0.60 percent mortgage insurance.

How principal and interest are calculated

Principal and interest come from one formula that every amortizing loan uses. It needs three inputs: the amount borrowed, the monthly interest rate and the number of payments.

The formula reads M = P x [r(1 + r)^n] / [(1 + r)^n - 1]. Here P is the loan, r is the annual rate divided by 12 and n is the number of months. The top half grows the balance with compound interest, and the bottom half spreads that growth across every payment.

Take $360,000 at 6.50 percent for 30 years. The monthly rate is 0.0054167 and there are 360 payments. Raising 1.0054167 to the 360th power gives 6.9918, so each dollar borrowed costs 0.0063207 per month. Multiply by the balance and the payment is $2,275.44.

The formula hides the split. Month one sends $1,950.00 to interest and $325.44 to principal. By month 180 the interest share is $1,419.54 and the principal share is $855.91. The payment never changes, but the mix flips.

Add the escrow pieces and the whole bill appears: 2,275.44 + 400.00 + 125.00 + 180.00 + 50.00 = 3,030.44.

Two details trip people up. The quoted rate is annual, so divide by 12. The term is in years, so multiply by 12. A 15 year loan is 180 payments.

Down payment size and mortgage insurance

Twenty percent down is the line that matters most. Below it, lenders usually add mortgage insurance because the loan carries more risk. At or above it, that line disappears.

On a $400,000 house, 10 percent down means a $360,000 loan at 90 percent loan to value. A 0.60 percent premium adds $180.00 a month. Push the down payment to 20 percent and the loan drops to $320,000, the premium goes to zero, and the payment falls by $432.82.

Mortgage insurance is not permanent on most conventional loans. The Homeowners Protection Act lets you ask the servicer to cancel it once the balance reaches 80 percent of the original price, and requires automatic cancellation at 78 percent. On the $360,000 loan the balance hits 80 percent after 95 payments, close to 8 years. Paying $180.00 for those months totals $17,100.00.

FHA loans differ. With 3.5 percent down the annual premium usually lasts the full term, so refinancing later is the common exit.

How the loan term changes the total

The term sets how fast you repay, and it moves both the monthly bill and the total interest by a wide margin. A shorter term raises the payment and cuts interest. A longer term does the reverse.

Here is the same $360,000 balance priced four ways. Rates differ a little because lenders charge less for shorter loans, which carry less risk.

Moving from 30 years to 15 years raises the payment by $714.04 and saves $281,054.42 in interest. That is the largest lever most buyers have. The catch is that the higher payment has to survive a bad month, a job change or a roof replacement.

A common middle path is a 30 year loan with extra principal each month. You keep the lower required payment for safety and still cut years off the schedule when money is loose.

Do not pick a term by payment alone. Compare the total paid column and ask whether the difference is worth the flexibility you give up.

Property tax, insurance and escrow

Property tax and home insurance are the two lines homeowners underestimate most. Neither is fixed by the loan, and both can jump in year two.

Property tax comes from the county assessor. Rates vary from about 0.30 percent of value in parts of the South to more than 2.00 percent in parts of the Northeast and Texas. On a $400,000 house, 1.20 percent works out to $4,800.00 a year, or $400.00 a month. At 2.00 percent the same house carries $666.67 a month, a difference of $266.67 that never touches the loan.

Insurance is priced on rebuild cost, roof age, claim history and location. Coastal wind and wildfire zones can run three to five times the national average. A $1,500 policy adds $125.00 a month; a $4,500 policy adds $375.00.

Most lenders require an escrow account when the down payment is under 20 percent. The servicer collects a share of both bills each month, holds the money and pays the county and the insurer. Federal rules cap the cushion at one sixth of the annual charges, about two months of payments.

Escrow is convenient but not free of surprises. If the county raises your assessment, the servicer recalculates and the payment rises even with a fixed rate. Watch the annual escrow analysis: a shortfall gets spread over 12 months, which is why a payment can climb by $80 or $100 with no change to the loan.

Extra payments and early payoff

Extra principal is the quietest way to cut the total cost of a house loan. The lender applies anything above the scheduled principal to the balance, and every dollar removed stops earning interest for the rest of the term.

On the $360,000 loan at 6.50 percent, adding $200.00 to the $2,275.44 payment changes the payoff from 360 months to 287 months. That is 6 years and 1 month earlier, and the interest bill falls from $459,160.16 to $350,243.31. The saving is $108,916.85.

The math works because of how amortization orders the split. Early payments are mostly interest, so an extra dollar at month 12 removes interest for 348 more months. The same dollar sent at month 300 only removes interest for 60 months. Time is the multiplier.

• Mark the extra amount as principal. Otherwise the servicer may hold it as a partial prepayment.
• Keep three to six months of payments in an emergency fund before you send extra.
• Compare the mortgage rate against other debts. A 22 percent credit card balance should go first.
• Check for a prepayment penalty. They are rare but still appear on some portfolio loans.

Biweekly plans promise the same result through 26 half payments a year, which equals 13 full payments. You can get there for free by sending the extra amount yourself once a year.

What moves your interest rate

The rate on the page and the rate on your closing disclosure are often different. The gap comes from credit score, loan to value, property type, occupancy and the fees you agree to pay.

Credit score carries the most weight. A 760 score usually earns the best tier on a conventional loan. A 680 score can cost 0.25 to 0.50 percent more in rate, which on $360,000 is about $59.00 to $118.00 a month. Checking your reports for errors before you apply is free.

Points are another lever. One discount point costs 1 percent of the loan, or $3,600.00 on $360,000, and typically lowers the rate by 0.25 percent. The monthly saving is near $59.00, so the break even lands around 61 months. If you plan to move in four years, points usually lose money.

Loan to value matters too. Crossing from 95 percent to 80 percent removes mortgage insurance and often improves the rate tier at the same time. That single move can cut a payment by more than $400.00.

Compare the annual percentage rate, not just the note rate. The APR folds in origination fees, points and mortgage insurance, so it gives a fairer picture. A quote with a lower rate but $6,000 in fees can cost more than a slightly higher rate with $1,200 in fees.

Get three written Loan Estimates on the same day, since rates move daily. The Federal Reserve publishes weekly averages if you want a baseline before you shop.

Mistakes that inflate the payment

Most payment surprises come from things buyers leave out of the budget, not from the loan math. These are the ones that show up again and again.

Forgetting closing costs. They run 2 to 5 percent of the price, which is $8,000.00 to $20,000.00 on a $400,000 house. That money is due before the first payment, so it competes with the down payment.

Budgeting only principal and interest. A $2,275.44 payment becomes $3,030.44 once tax, insurance, mortgage insurance and HOA dues are added. Lenders qualify you on the full number, and so should you.

Ignoring a special assessment. Condo and HOA boards can levy one time charges for roofs, paving or lawsuits. Ask for two years of meeting minutes and the reserve study.

Assuming the tax bill stays put. A sale often triggers reassessment. The seller's $3,200.00 bill can become $4,800.00 for you, adding $133.33 a month.

Skipping the inspection to win a bidding war. A $500.00 inspection that finds a $12,000.00 foundation issue is the cheapest money you will spend.

Stretching to the approval limit. Lenders allow a debt to income ratio near 43 to 50 percent. Living at the ceiling leaves nothing for repairs. A payment at 28 percent of gross income is a safer target for most households.

Run the numbers twice: the payment you want and the payment you can carry through a job loss.