How your mortgage payment is calculated

A monthly house payment has four main parts, known as PITI: principal, interest, taxes and insurance. Principal and interest come from the standard amortization formula. Your lender collects taxes and insurance in an escrow account and pays those bills for you.

Worked example: a $400,000 home

With 20% down ($80,000) you borrow $320,000. At 6.5% for 30 years, principal and interest come to $2,022.62 a month. Add $366.67 of property tax (1.1% a year) and $150 of insurance and the full payment is $2,539.28. Over 30 years you would pay about $408,000 in interest, more than the amount you borrowed.

Why the early years are mostly interest

Interest is charged on the remaining balance, so at the start almost every dollar goes to the bank. In the first year of the loan above, about $20,700 goes to interest and only $3,600 to principal. The split flips over time, which the chart in the calculator shows year by year. Extra principal payments early in the loan have the biggest effect on total interest.

15-year or 30-year?

The 15-year loan costs about $765 more a month but saves over $226,000 in interest, and 15-year rates are usually lower than 30-year rates as well.

What is PMI?

Private mortgage insurance protects the lender when you put less than 20% down on a conventional loan. It usually costs 0.3% to 1.5% of the loan per year. Under the Homeowners Protection Act, it must end automatically once your balance reaches 78% of the home's original value, and you can ask to cancel it at 80%. FHA loans have their own mortgage insurance premium (MIP) with different rules.

How much house can you afford?

• Many lenders want your housing payment under 28% of gross monthly income.
• Your total debt payments, including car loans and credit cards, should stay under about 36%.
• Budget for closing costs of 2–5% of the loan, plus maintenance of about 1% of the home's value a year.

Sources: Consumer Financial Protection Bureau (CFPB); Homeowners Protection Act of 1998; Freddie Mac Primary Mortgage Market Survey.

Frequently asked questions

How your car payment is calculated

First the calculator works out how much you borrow: the price of the car, minus your trade-in, plus sales tax and fees, minus your down payment. Then it uses the same amortization formula as a mortgage to spread that amount over the loan term.

Most states tax only the difference between the new car's price and your trade-in, which is one reason trading in at the dealer can beat a private sale. A few states, including California, tax the full price.

Worked example

A $35,000 car with 7% sales tax ($2,450), $800 in fees and $5,000 down leaves $33,250 to finance. At 7.5% APR for 60 months the payment is $666.26 a month, and you pay $6,726 in interest.

Shorter or longer loan?

Stretching the loan from 60 to 84 months lowers the payment by about $156, but costs nearly $2,900 more in interest. Lenders also tend to charge higher rates on longer terms, and because cars lose value fast, a long loan leaves you "underwater," owing more than the car is worth, for years.

Tips for a cheaper car loan

• Get pre-approved by a bank or credit union before you visit the dealer, so you have a rate to beat.
• Negotiate the price of the car, not the monthly payment.
• A common guideline is the 20/4/10 rule: 20% down, a loan of 4 years or less, and total car costs under 10% of your gross income.
• Check the loan for add-ons such as extended warranties and GAP insurance that were rolled into the amount financed.

Sources: Consumer Financial Protection Bureau (CFPB), Auto loans; Federal Reserve G.19 Consumer Credit release.

Frequently asked questions

How compound interest works

Compound interest means you earn interest on your interest. Each month, the return is added to your balance, and next month's return is calculated on that larger balance. Over long periods the growth speeds up, and in the later years interest can add more each year than your own contributions do.

Worked example

Start with $10,000 and add $500 a month at a 7% annual return. After 30 years you have about $691,150. You put in $190,000; the other $501,150, almost three quarters of the total, is interest. At 3% inflation, that balance would buy about what $284,700 buys today.

The rule of 72

To estimate how long it takes money to double, divide 72 by the annual return. At 7%, money doubles about every 10 years. At 10%, about every 7 years. At a 0.5% savings rate, it takes 144 years.

Returns on stocks vary widely from year to year. Long-run averages are useful for planning, not a promise.

Ways to make compounding work harder

• Start early. Ten extra years at 7% roughly doubles the ending balance.
• Use tax-advantaged accounts. A 401(k) or IRA lets returns compound without being taxed each year.
• Take the full employer match. A 50% match on 401(k) contributions is an instant 50% return.
• Keep fees low. A 1% annual fee can cut a 30-year balance by about a quarter.

Sources: U.S. Securities and Exchange Commission, Investor.gov compound interest guidance; FINRA Investor Education.

Frequently asked questions

How credit card interest works

Card issuers turn your APR into a daily or monthly rate and charge it on the balance you carry. Each payment first covers that month's interest; only what is left reduces the balance. That is why small payments barely move a large balance.

Worked example

A $6,500 balance at 22.8% APR is charged about $123.50 of interest in the first month. Paying $250 a month clears it in 37 months with about $2,549 of interest. Paying only the minimum, 1% of the balance plus interest, takes more than 21 years and costs over $11,000 in interest.

Why the minimum payment is a trap

The minimum shrinks as your balance falls, so you pay less and less principal each month. Federal rules require your statement to show how long payoff takes at the minimum, and it is often decades. Paying a fixed amount each month, even a little above the first minimum, cuts years off the debt.

Two payoff strategies for several cards

• Avalanche: pay the minimum on every card and put extra money on the highest APR first. It costs the least interest.
• Snowball: put extra money on the smallest balance first. It costs a bit more but gives quick wins that keep many people going.

Ways to pay less interest

• Balance transfer: many cards offer 0% APR for 15–21 months, usually for a 3–5% fee. Pay the balance off before the promotion ends.
• Debt consolidation loan: a personal loan at a lower fixed rate, often 10–15% for good credit, with a set payoff date.
• Ask for a lower APR: a phone call to your issuer works more often than people expect, especially with a good payment history.
• Stop adding charges to the card while you pay it down.

Sources: Consumer Financial Protection Bureau (CFPB); Credit CARD Act of 2009; Federal Reserve G.19 Consumer Credit (average credit card APR).

Frequently asked questions