Mortgage Calculator

The four parts of a mortgage payment

Lenders and property listings usually quote principal and interest, which is the part that pays down the loan. For most borrowers that is well under the amount actually debited each month.

Property tax is levied by local government as a percentage of assessed value, typically between 0.5% and 2.5% per year depending on where you are. It is normally collected monthly by the lender into an escrow account and paid on your behalf.

Home insurance is required by every lender protecting a mortgaged property, and is likewise usually escrowed.

Mortgage insurance is the fourth. It protects the lender, not you, and is generally required when your down payment is under 20%. It is the only one of the four that can be removed later — once you reach roughly 20% equity, you can usually have it cancelled, which is worth diarising because it does not always happen automatically.

Why the down payment threshold matters so much

Twenty percent is the number that changes the arithmetic. Below it you pay mortgage insurance, typically 0.3% to 1.5% of the loan per year, which buys you nothing. On a $320,000 loan at 0.6% that is roughly $160 a month for no benefit to you at all.

A larger down payment also reduces the principal, which reduces both the monthly payment and the total interest across the whole term. And because lenders price risk, a larger deposit often earns a slightly better rate as well — so the saving compounds across three separate mechanisms.

The counterargument is opportunity cost. Money in a deposit is money not invested elsewhere, and if your mortgage rate is low relative to expected returns, a smaller deposit can be rational. That calculation shifts substantially when rates are high.

Reading the amortization schedule

The schedule shows how little of an early mortgage payment reduces the debt. On a 30-year loan at 6.5%, the first year's payments are roughly 85% interest. You do not reach the crossover point — where more of each payment goes to principal than to interest — until somewhere around year 18.

This is why selling in the first few years leaves you with far less equity than the payments suggest, and why overpaying early is so much more effective than overpaying late. An extra payment in year one removes 29 years of future interest on that amount; the same payment in year 25 removes five.

The closing balance column also tells you when you cross 20% equity and can ask for mortgage insurance to be removed — assuming the property value has not fallen.

What is still missing

Closing costs, which typically run 2–5% of the purchase price and are paid up front: origination fees, appraisal, title insurance, legal fees, recording fees, and often prepaid escrow.

Maintenance, which no lender asks about but which is real. A common rule of thumb is 1% of the property value per year averaged over time, more for an older building.

Homeowners' association or service charge fees, where applicable, which can be substantial and are not escrowed by the lender.

And this assumes a fixed rate for the whole term. On an adjustable-rate mortgage the figures hold only until the first reset, after which the payment changes — sometimes considerably.