The Complete Guide to Mortgages

Buy a $400,000 home with 20 percent down at a 6.5 percent rate, and over thirty years you will hand the lender roughly $383,000 in interest, nearly the price of the house a second time. That single fact is why understanding a mortgage is worth more than almost any other money decision you will make. The good news: a mortgage is built from a handful of moving parts, and once you can see them, you can move them.

What actually makes up a mortgage payment

Lenders shorten the monthly payment to four letters: PITI. Principal pays down what you borrowed. Interest is the lender's charge on the balance you still owe. Taxes are your property taxes, usually collected monthly into an escrow account. Insurance is your homeowners policy, collected the same way. If you put down less than 20 percent on a conventional loan, a fifth line quietly joins them: private mortgage insurance.

The part that surprises most first-time buyers is how the principal and interest split changes over time. Early in the loan, the balance is large, so almost every dollar goes to interest and only a sliver to principal. As the balance falls, that flips, which is why the last decade of a mortgage pays it down far faster than the first. Run your own numbers below and watch how the first payment divides.

How much house you can actually afford

A lender's approval and a comfortable budget are two very different numbers. Lenders size a loan with the 28/36 rule: your total housing payment should stay at or below 28 percent of gross monthly income, and all of your debt payments together, housing plus cars, cards, and loans, at or below 36 percent. Because they use the lower of those two ceilings, paying down other debt can raise your home budget as much as a raise would.

The smarter move is to work backward. Start from a monthly payment that leaves room for retirement saving, emergencies, and the real costs of ownership, then find the price that fits it, rather than stretching to the maximum a lender will approve. Being approved for an amount is not the same as it being wise to borrow it.

The home affordability calculator applies the 28/36 rule to your income and debts and returns a comfortable price range, along with the payment behind it, so you can shop from a number you chose rather than one a lender handed you.

The three levers that move your payment

Almost everything about a mortgage comes down to three inputs. Nudge any one and the payment, and the total interest, move with it.

The term choice is the one buyers underestimate most. On that same $400,000 loan, moving from a 30 year to a 15 year term roughly doubles the monthly payment but cuts total interest by more than half. Whether that trade is worth it depends on what else the money could do, but you should see the real figures before deciding. The compare mortgage terms calculator puts 15, 20, and 30 year loans side by side on both payment and lifetime cost.

The down payment, and getting rid of PMI

Twenty percent down is the number everyone quotes, and for good reason: it avoids private mortgage insurance and usually earns a better rate. But plenty of buyers put down less through conventional, FHA, or VA programs, and a smaller down payment is not a mistake if the alternative is draining your emergency fund.

If you do put down less than 20 percent on a conventional loan, PMI is added to your payment. It protects the lender, not you, and it can be removed. You can request cancellation once your loan-to-value reaches 80 percent, and by law it ends automatically at 78 percent. Extra principal payments get you there faster, and so can a rising home value, sometimes with a new appraisal. Because PMI adds nothing to your equity, dropping it as soon as you qualify is one of the easiest ways to cut a payment. The PMI calculator estimates the monthly cost and how many years until it falls away.

Fixed, adjustable, and the major loan types

A fixed-rate mortgage locks your rate for the life of the loan, so the payment never changes. It is the default for most buyers because it is predictable. An adjustable-rate mortgage starts with a lower rate for an initial period, five or seven years is common, then adjusts on a schedule. An ARM can make sense if you expect to move or refinance before the fixed period ends, but you are taking on the risk that rates rise. Our fixed vs. ARM calculator shows the starting payment against what it could become.

Beyond the rate structure, the loan program matters. Conventional loans are the standard. FHA loans allow lower down payments and credit scores in exchange for mortgage insurance. VA loans serve eligible veterans with no down payment and no monthly mortgage insurance. Each has trade-offs in cost and eligibility, and the right one depends on your finances and how long you plan to stay. You can compare the payments directly with the FHA and VA loan calculators.

Closing costs and the true cost of buying

The price on the listing is only the start. Closing costs typically run 2 to 5 percent of the loan and cover the appraisal, title insurance, lender fees, and prepaid taxes and insurance, all due at signing on top of your down payment. After you move in, the ongoing costs, property taxes, homeowners insurance, maintenance (often budgeted near 1 percent of the home's value a year), and any HOA dues, add hundreds to the monthly figure beyond principal and interest.

Budgeting for the full picture is what prevents the most common trap in home buying: qualifying for a payment you cannot comfortably sustain once the real bills arrive. The closing costs calculator and the property tax estimator help you put real numbers on the parts of ownership that do not show up in the mortgage quote.

When refinancing actually pays off

Refinancing replaces your current loan with a new one, usually to capture a lower rate. The decision is not about how far rates have fallen in the abstract; it is about your personal break-even. Add up the closing costs on the new loan, divide by the monthly payment savings, and you get the number of months it takes to come out ahead. If you will keep the home past that point, refinancing pays; if you might sell or refinance again sooner, it does not.

A cash-out refinance follows the same math but with a twist: you borrow more than you owe and take the difference in cash, which raises the balance and often the rate on your whole loan. Whichever path you are weighing, the refinance calculator and the break-even calculator turn it into a single, honest number.

Frequently asked questions