You run a mortgage calculator, get $1,850 a month, and budget around it. Then the actual payment is $2,400 and the budget is wrong by six hundred dollars a month.
The calculator was not wrong. It answered the question it was asked, which covers principal and interest, roughly two thirds of what you will actually pay.
The four parts: PITI
Lenders call the real monthly payment PITI.
Principal
The part that reduces what you owe. Early in a 30-year loan this is a depressingly small share of the payment, and late in the loan it is nearly all of it.
Interest
The lender’s charge on the outstanding balance. The balance starts at its maximum and interest is calculated on it, so the first years of a mortgage are overwhelmingly interest.
On a $350,000 loan at 6.5% for 30 years, the payment is about $2,212. In month one, roughly $1,896 of that is interest and only $316 touches the principal. It takes about eighteen years before the split reverses.
This is also why extra principal payments are so effective early on. A single extra $316 in month one removes a dollar of principal that would otherwise have accrued interest for 359 more months.
Taxes
Property tax, collected monthly by the lender and held in escrow until the bill arrives.
Rates vary enormously, from roughly 0.3% of assessed value annually in the lowest states to over 2% in the highest. On a $400,000 home that is a range of $100 to $670 a month, which is not a rounding error.
Property tax also rises. Reassessments follow the market, and a purchase often triggers one. A payment that fits comfortably at closing can be uncomfortable in three years, entirely through this line.
Insurance
Homeowner’s insurance, also escrowed. It typically runs $100-$250 a month, and much more in areas exposed to hurricanes, wildfire, hail or flood. Flood insurance is separate and is not included in a standard policy.
Like property tax, premiums have been rising sharply in exposed regions. Get an actual quote for the actual address before committing.
PMI: the fifth component
If your down payment is under 20%, expect private mortgage insurance. It protects the lender, not you, and typically runs 0.3-1.5% of the loan annually depending on your credit and down payment.
On a $350,000 loan at 0.5%, that is $146 a month.
PMI is removable. Under the Homeowners Protection Act, PMI must be cancelled automatically at 78% loan-to-value based on the original amortisation schedule, and you can request cancellation at 80%. Many people pay it for years past the point they could have removed it, because nobody tells them. If your home has also appreciated, a new appraisal can get you there far sooner than the schedule.
Put it in your calendar. It is one of the easiest few thousand dollars to recover in personal finance.
FHA loans work differently. Their mortgage insurance premium generally lasts the life of the loan unless you put down 10% or more, which is a significant argument for refinancing out of an FHA loan once you have equity.
HOA dues
HOA dues aren’t part of PITI and the lender doesn’t collect them, but they are due every month regardless. They run anywhere from $50 for a suburban association to $1,500 for a serviced condo building.
Lenders count HOA dues in your debt-to-income ratio, so they affect how much you can borrow as well as what you pay.
Ask two questions the listing will not answer: what the dues history has been, and whether there is a reserve study. An underfunded association means a special assessment, and those arrive as five-figure bills.
A worked example
A $400,000 home, 10% down, 6.5% for 30 years:
| Component | Monthly |
|---|---|
| Principal and interest | $2,275 |
| Property tax (1.1%) | $367 |
| Homeowner’s insurance | $150 |
| PMI (0.5%) | $150 |
| HOA | $0 |
| Actual payment | $2,942 |
The calculator said $2,275. The real figure is 29% higher.
And the costs that are not monthly
Closing costs run 2-5% of the purchase price: origination, appraisal, title insurance, recording, prepaid escrow. On $400,000 that is $8,000 to $20,000, due at closing, on top of the down payment.
Maintenance is the one that ruins budgets. The common rules of thumb are 1-2% of home value annually, or a dollar per square foot per year. On a $400,000 home that is $4,000 to $8,000 a year, or $333 to $667 a month, and it does not arrive evenly. It arrives as a roof.
Utilities are usually higher than in a rental of equivalent nominal size, and you now pay for things a landlord covered.
What this means for affordability
The traditional guidance is that PITI should stay under 28% of gross income, and total debt under 36%. Lenders will approve well beyond that, and being approved for a payment is a different question from being able to live on what remains.
A more useful test: take the full figure including maintenance, subtract it from your take-home pay, and ask whether the remainder still supports the life you have. Use your actual take-home from the paycheck calculator, not your gross.
The checklist
- Start with principal and interest, from the mortgage calculator.
- Add property tax at the actual local rate for that address.
- Get a real insurance quote, not an estimate.
- Add PMI if you are under 20% down, and diarise its removal.
- Add HOA dues, and ask about the reserve study.
- Budget 1-2% of value annually for maintenance.
- Have closing costs in cash, separately from the down payment.
The mortgage calculator handles principal and interest and the amortisation schedule. What it does and does not include is set out on the methodology page.