What a mortgage payment actually contains
A mortgage payment is four bills in one: principal, interest, property taxes, and homeowners insurance, shortened to PITI. On a typical $400,000 purchase, taxes and insurance often add $400 to $600 a month on top of principal and interest. Quotes showing only principal and interest understate your real payment by 20 to 30 percent.
Two extras can join the bundle: private mortgage insurance when the down payment is below 20 percent, and HOA dues in condos and planned communities. Before loving any listing, ask the lender for the full PITI plus HOA figure, because that total, not the sticker price, decides whether you can afford the home.
- PITI means principal, interest, taxes, and insurance in one bill
- Confirm PMI and HOA dues before offering on any home
- Judge affordability on the full bundle, never principal alone
Down payments and PMI: the 20 percent line
Twenty percent down on $400,000 is $80,000, leaving a $320,000 loan with no private mortgage insurance. Put 10 percent down ($40,000) and the loan grows to $360,000 plus PMI, which at a typical 0.7 percent annual rate costs $210 a month (360,000 times 0.007 divided by 12). Until you reach 20 percent equity, that surcharge totals $12,000 to $17,000 of pure cost.
Smaller down payments still make sense when rent is high or cash reserves matter more than the surcharge. But five percent down ($20,000) starts you with just $20,000 of equity against $380,000 of debt and no cushion if prices dip. Whatever percentage you choose, keep three to six months of full PITI payments in reserve after closing.
- 20 percent on $400,000: $80,000 down, $320,000 loan, zero PMI
- 10 percent down: $360,000 loan plus about $210 monthly PMI
- Never empty emergency savings just to hit 20 percent
Rates and points, worked on $320,000
At 6.5 percent fixed over 30 years, a $320,000 loan costs $2,022.62 a month in principal and interest. Over 360 payments the lifetime total is about $728,142, meaning roughly $408,142 of interest on top of the $320,000 borrowed. More than half of every early payment is interest, which is why the balance barely moves in the first years.
Lenders sell discounts called points: one point costs 1 percent of the loan ($3,200 here) and typically cuts the rate about 0.25 points. Dropping to 6.25 percent lowers the payment to about $1,970.30, saving $52.32 monthly, so the point breaks even after roughly 61 months (3,200 divided by 52.32). Buy points only if you will stay past breakeven.
- $320,000 at 6.5 percent for 30 years: $2,022.62 monthly
- Lifetime interest near $408,142 on $728,142 total paid
- One $3,200 point saves $52.32 monthly; breakeven near 61 months
Closing costs: the 2 to 5 percent nobody budgets
Closing costs run 2 to 5 percent of the price, which is $8,000 to $20,000 on a $400,000 home, due in cash on closing day alongside the down payment. The bundle includes origination fees, appraisal and inspection, title insurance and search, prepaid taxes and insurance into escrow, and recording fees. Buyers who budget only the down payment get an awful surprise two weeks before moving.
Three moves tame the bill: compare Loan Estimates from three lenders line by line, since origination fees vary by thousands; ask the seller for closing-cost credits in a slow market; and challenge junk fees like courier or document-preparation markups, which lenders often waive. Every $1,000 negotiated off closing preserves $1,000 of down payment.
- Budget $8,000 to $20,000 closing cash on a $400,000 purchase
- Compare three Loan Estimates; fees differ by thousands
- Negotiate seller credits and challenge junk fees directly
How much house can you afford
Lenders use the 28-36 rule: at most 28 percent of gross monthly income on housing and 36 percent on all debts combined. A household earning $120,000 takes home $10,000 a month before tax, so housing caps at $2,800 and total debts at $3,600. With $600 in car and student-loan payments, the combined cap leaves exactly $3,000 for housing plus those loans.
Our $320,000 loan at 6.5 percent takes $2,023 of principal and interest, and adding $400 in taxes plus $150 in insurance reaches $2,573, comfortably under the $2,800 ceiling. That supports roughly a $380,000 to $420,000 purchase with 10 to 20 percent down at current rates. Stretch past 30 percent only with large reserves, because one tax reassessment can break a tight budget.
- $120,000 income allows about $2,800 housing, $3,600 total debt
- $400,000 home at 20 percent down totals about $2,573 monthly
- Supports roughly $380,000 to $420,000 at 6.5 percent rates
First-time buyer mistakes to avoid
The most expensive error is confusing prequalification with preapproval. Prequalification is a self-reported estimate that sellers ignore, while preapproval means verified income, credit, and bank statements plus a hard credit pull. House-hunting without preapproval wastes weekends and loses bidding wars to buyers whose financing is already proven.
The next three mistakes compound it: draining every dollar into the down payment and moving in with zero buffer, opening new credit cards or car loans mid-process that can void the approval, and waiving inspection to win a bid, turning a $500 inspection into a $25,000 foundation surprise. Get preapproved, freeze new borrowing, and inspect everything.
- Get preapproved with verified documents, not just prequalified
- Keep 3 to 6 months of PITI in reserve after closing
- Open no new credit mid-process; never waive inspection
Mortgage questions, answered
Should you choose 15 or 30 years? The 15-year loan charges far less lifetime interest but demands roughly 40 to 50 percent higher monthly payments, so only deep income cushions should take it. Most buyers do better with a 30-year loan plus voluntary extra payments, keeping the low required payment as insurance against bad months.
What is escrow? A holding account where part of each payment accumulates for annual tax and insurance bills, paid by the servicer on your behalf. Can PMI be removed? Yes: request cancellation at 20 percent equity (a new appraisal helps after renovations); it drops automatically at 22 percent on conforming loans. Moving within three to four years? Renting usually wins once closing costs and agent fees count.
- 30-year plus extra payments beats 15-year for most budgets
- PMI cancels at 20 percent on request, 22 percent automatic
- Staying under 4 years usually favors renting over buying