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Understanding Your Mortgage
PMI (Private Mortgage Insurance): Required when down payment is less than 20%. Typically removed once you reach 20% equity. 15-year vs 30-year: 15-year mortgages have higher monthly payments but significantly lower total interest. Extra payments: Even small additional payments can save years off your mortgage and thousands in interest.
Understanding US Mortgages
Fixed-Rate vs. Adjustable-Rate Mortgages
A fixed-rate mortgage locks in the same interest rate for the entire loan term — typically 15 or 30 years — giving you predictable monthly payments. An adjustable-rate mortgage (ARM) starts with a lower introductory rate that resets periodically based on a market index. ARMs are often written as 5/1, 7/1, or 10/1, meaning the rate is fixed for the first 5, 7, or 10 years then adjusts annually. ARMs can save money if you plan to move or refinance before the first adjustment, but carry the risk of rising payments if rates increase.
Private Mortgage Insurance (PMI)
Lenders require PMI when your down payment is less than 20% of the purchase price. PMI typically costs 0.5% to 1.5% of the original loan amount per year, added to your monthly payment. Under the federal Homeowners Protection Act, your servicer must automatically cancel PMI once your loan balance reaches 78% of the original home value. You can also request cancellation at 80%. Some borrowers avoid PMI entirely with a piggyback loan structure (80/10/10) or through lender-paid PMI at a slightly higher interest rate.
How Amortization Works
Each monthly mortgage payment is split between interest and principal. Early in the loan, the majority goes toward interest because the outstanding balance is large. Over time the split shifts and more of each payment reduces the principal. A 30-year, $350,000 mortgage at 7% pays roughly $2,329 per month. In the first payment, about $2,042 is interest and only $287 goes to principal. By year 20, the split is nearly equal. Making even one extra payment per year can shave several years off a 30-year mortgage and save tens of thousands in interest.
Closing Costs and Escrow
Beyond the down payment, buyers should budget 2–5% of the home price for closing costs, which include appraisal fees, title insurance, origination fees, and prepaid property taxes and insurance. Many lenders require an escrow account that collects monthly portions of property tax and homeowner's insurance alongside your mortgage payment, ensuring these bills are paid on time.
Frequently Asked Questions
What is included in a monthly mortgage payment?
A monthly mortgage payment typically includes principal, interest, property taxes, homeowner's insurance, and PMI (private mortgage insurance) if your down payment is less than 20%. This is often referred to as PITI. Your lender may also collect escrow for taxes and insurance as part of the payment.
How much house can I afford?
A common guideline is that your total monthly housing costs should not exceed 28% of your gross monthly income. Lenders also look at your total debt-to-income ratio, which should generally stay below 36%. Factor in property taxes, insurance, HOA fees, and maintenance costs — not just the mortgage payment.
What is PMI and when can I remove it?
Private Mortgage Insurance (PMI) is required when your down payment is less than 20% of the home price. Under the Homeowners Protection Act, your lender must automatically cancel PMI when your mortgage balance reaches 78% of the original home value. You can request removal at 80% loan-to-value.
What is the difference between a fixed-rate and adjustable-rate mortgage?
A fixed-rate mortgage keeps the same interest rate for the entire loan term, providing predictable payments. An adjustable-rate mortgage (ARM) starts with a lower rate that adjusts periodically based on market conditions, which can increase or decrease your payment after the initial fixed period ends.
Should I choose a 15-year or 30-year mortgage?
A 15-year mortgage has higher monthly payments but a lower interest rate and saves significantly on total interest. A 30-year term offers lower monthly payments and more flexibility. For example, a $350,000 loan at 7% costs about $488,000 in total interest over 30 years versus roughly $192,000 over 15 years — a savings of nearly $296,000.