The parts of a mortgage
| Term | What it means |
|---|---|
| Principal | The amount you borrow and still owe |
| Interest | The cost of borrowing, shown as a yearly percentage rate |
| Term | How long you have to repay, often 15 or 30 years |
| Escrow | An account the lender sets up to pay property taxes and insurance from part of your monthly payment |
| Lien | The lender's legal claim on the home until the loan is repaid |
| Down payment | The part of the price you pay upfront, not borrowed |
What's in a monthly mortgage payment
Each payment covers interest for the month and repays some principal. Homeowners insurance, property taxes and private mortgage insurance are typically added to the payment and paid through escrow.
P = loan amount, r = annual rate ÷ 12, n = number of monthly payments
Worked example
A $300,000, 30-year fixed loan at 6.5% (an example rate):
- r = 0.065 ÷ 12, n = 360.
- Principal and interest: $1,896.20 a month.
- First month's interest: $300,000 × 0.065 ÷ 12 = $1,625.00. The other $271.20 repays principal.
- Add escrow for property taxes of $300 and insurance of $150 a month (example amounts): total payment $2,346.20.
Early payments are mostly interest. As the balance falls, more of each payment goes to principal; this schedule is called amortization. See it with the amortization calculator, or try other prices and rates with the mortgage calculator. The math is explained in how loan payments are calculated.
Fixed or adjustable rate
With a fixed rate, the rate and the principal and interest payment never change, though taxes and insurance can. With an adjustable rate (ARM), the rate is fixed for an initial period and then changes with an index, so payments can rise. See types of mortgage loans.
The lien and what happens at payoff
The mortgage gives the lender a claim on the home until the debt is repaid. When you pay off the loan, by making the last payment, refinancing or selling, the lender releases its claim. Your payoff amount includes interest built up since your last payment and any unpaid fees, so it's slightly more than your statement balance. See selling a house with a mortgage and the mortgage payoff calculator.
Foreclosure basics
If you stop paying, the lender can eventually take the home through foreclosure. Under federal rules, the legal foreclosure process generally can't start until you're at least 120 days behind. How long the rest takes varies by state. If you're struggling, contact your servicer early and talk to a HUD-approved housing counselor; options can include loan modification or a short sale.
Costs beyond the payment
- Closing costs for the loan and purchase. See who pays closing costs.
- Points, if you choose to buy a lower rate. See mortgage points.
- APR shows the rate plus certain fees. See what APR is.
Ready to buy? See how to buy a house and check your budget with the home affordability calculator.
Sources: CFPB: what is a mortgage?; CFPB: key mortgage terms; CFPB: loan options; CFPB: the 120-day rule for foreclosure.
Every worked example on this page was checked with Calcist's own engine and an independent reference.