Buying a home isn't just about finding the right property; it's also about understanding the mortgage that makes it possible. From principal and interest to taxes, insurance and fees, these components determine your monthly payment and total cost of your loan.
Understanding how factors such as interest rates, loan terms and down payments affect affordability can help you make better-informed decisions before signing the deal.
What makes up your monthly mortgage payment
A mortgage is a loan that's used to purchase a home. It's typically made up of:
- Principal: The amount of money you borrow to buy your home.
- Interest: The cost you pay to borrow from your lender, expressed as a percentage.
- Term: The length of time you'll repay the loan.
- Taxes: It's usually one-twelfth of the estimated annual property taxes on your purchased home.
- Home insurance: Protects you and your lender from fire or flood damage. It also protects you from other liabilities, such as injury to a visitor to your home or additional damage to your property.
- Other fees: These may include homeowners association, or HOA, dues or mortgage insurance, depending on your loan type.
These components, combined, determine your monthly payment and the total cost of your loan.
How loan terms and down payments shape your monthly costs
Even after you know the basics of a mortgage payment, factors like interest rates, loan length and down payment size can dramatically change what you pay each month and over the life of the loan.
- Interest rates: A small change in rates can affect your monthly payment and the total interest paid. For instance, a quarter-point decrease in the 30-year fixed mortgage average could save the borrower as much as $70, according to data from loanDepot, a nonbank holding company that sells mortgage and non-mortgage lending products.
- Loan terms: Shorter terms result in higher monthly payments but lower interest over the life of the loan. Longer terms, such as 30-year mortgages, have lower payments but higher total interest.
- Down payment: A bigger down payment could help reduce your loan amount and help you qualify for a lower interest rate. It would also lower your loan-to-value or LTV ratio, which is the percentage of the home’s price that you’re borrowing. It’s calculated by dividing the loan amount by the home’s appraised value or purchase price. This is how lenders assess your lending risks.
Every listing on Homes.com includes an affordability calculator. You can adjust your down payment, interest rate and loan term to see different financial scenarios. The calculator utilizes real estate data to provide a property-specific breakdown of estimated taxes, homeowners association fees and homeowners insurance.
Why your payment can change over time
Even with a fixed interest rate, your monthly payment isn’t set in stone. That’s because part of your payment goes into an escrow account, which your lender uses to pay property taxes and homeowners insurance on your behalf. Here’s why:
- Escrow adjustments: Property taxes and insurance premiums can rise or fall. If they increase, your lender will adjust your monthly payment to cover the difference.
- Insurance changes: If you switch insurance providers or change your coverage, the premium amount will change. Your lender updates the escrow account to reflect the new cost.
How interest and principal shift over time
Mortgages are amortized, meaning the mix of interest and principal changes as you pay down the loan:
- Early years: Most of your payment goes toward interest, so equity builds slowly.
- Later years: More goes toward principal, accelerating equity growth.
This structure matters because it affects how quickly you own more of your home.