Your total monthly mortgage payment consists of several components, commonly abbreviated as PITI:

Principal

Principal is the amount you borrowed to purchase the home. Each monthly payment includes a portion that goes toward paying down this loan balance. In the early years of a 30-year mortgage, only a small percentage goes toward principal. As the loan progresses, more of each payment reduces the principal balance.

Interest

Interest is the cost of borrowing money from the lender. It’s calculated as a percentage of your remaining loan balance. For example, on a $300,000 loan at 7% interest, your first month’s interest charge would be approximately $1,750. As you pay down the principal, the interest portion decreases while the principal portion increases.

Property Taxes

Property taxes are annual taxes assessed by your local government based on your home’s value. Rates vary dramatically by location, from as low as 0.3% in Hawaii to over 2.5% in New Jersey. Most lenders require you to pay property taxes monthly through an escrow account, then the lender pays the tax bill on your behalf when due.

Homeowners Insurance

Homeowners insurance protects your home and belongings against damage from fire, storms, theft, and other covered perils. All mortgage lenders require you to maintain adequate insurance coverage. Annual premiums typically range from $1,000 to $3,000 depending on your home’s value, location, and coverage level.

PMI and HOA Fees

Private Mortgage Insurance (PMI) is required when your down payment is less than 20% of the home’s value. It typically costs 0.5-1.5% of the loan amount annually. PMI can be removed once your loan-to-value ratio reaches 78%.

HOA fees apply if you’re buying a condo, townhome, or home in a planned community. These monthly fees cover maintenance of common areas, amenities, landscaping, and exterior building maintenance.

Conventional Loans

Conventional mortgages are not backed by the government and typically require good credit (620+ FICO score) and at least 5% down. For 2024-2025, the conforming loan limit is $766,550 in most areas. Loans above this are “jumbo loans” with stricter requirements.

Best for: Buyers with good credit, stable income, and at least 5-20% down payment.

FHA Loans

FHA loans are backed by the Federal Housing Administration and designed for first-time buyers or those with lower credit scores (580+ FICO). You can qualify with just 3.5% down, but you’ll pay both an upfront mortgage insurance premium (1.75% of loan amount) and annual mortgage insurance (0.55-0.85%). Unlike PMI, FHA mortgage insurance typically stays for the life of the loan if your down payment is less than 10%.

Best for: First-time buyers, those with credit scores between 580-680, or buyers with limited down payment savings.

VA Loans

VA loans are available to active-duty service members, veterans, and eligible surviving spouses. These government-backed loans offer incredible benefits: no down payment required, no PMI, competitive interest rates, and limited closing costs. You will pay a one-time funding fee (0.5-3.6% of loan amount), but this can be rolled into the loan.

Best for: Eligible veterans and active-duty military looking to maximize purchasing power with zero down payment.

USDA Loans

USDA loans are designed for rural and suburban homebuyers with low-to-moderate income. Like VA loans, they offer 100% financing (no down payment), but you must purchase in a USDA-eligible area and meet income limits (typically 115% of area median income).

Best for: Buyers in rural or suburban areas who meet income requirements and want zero down payment financing.

30-Year vs 15-Year Fixed

The 30-year fixed-rate mortgage is America’s most popular home loan. Your monthly payment stays the same for 30 years, but you pay significantly more interest over time.

A 15-year fixed-rate mortgage offers a lower interest rate (typically 0.5-0.75% less) and builds equity much faster, but monthly payments are 30-50% higher. For example, on a $300,000 loan: 30-year at 7.0% = $1,996/month ($418,527 total interest) vs 15-year at 6.5% = $2,613/month ($170,382 total interest). The 15-year saves over $248,000 in interest.

Beyond your down payment, you’ll need cash to cover closing costs, which typically range from 2-5% of the home’s purchase price. On a $400,000 home, expect $8,000-$20,000 in closing costs.

Loan Origination Fees (0.5-1%)

Charged by the lender to process your mortgage application. On a $300,000 loan, this could be $1,500-$3,000.

Appraisal Fee ($400-$700)

Required by lenders to verify the home’s value matches or exceeds the loan amount.

Title Insurance ($800-$3,500)

Protects you and the lender against ownership disputes, liens, or title defects. Cost varies by state and home price.

Attorney/Settlement Fees ($500-$1,500)

In some states, attorneys must be present at closing. Even where optional, many buyers hire attorneys to review documents.

Home Inspection ($300-$600)

While optional, a professional home inspection is highly recommended to identify potential problems before purchase.

Prepaid Items

You’ll pay several months of property taxes and homeowners insurance upfront to establish your escrow account, plus prepaid interest from your closing date to the end of the month. These can add $2,000-$6,000 to your closing costs.

1. Increase Your Down Payment to Avoid PMI

Putting down 20% or more eliminates private mortgage insurance, which can save $100-$400 per month. On a $300,000 home, increasing your down payment from 10% ($30,000) to 20% ($60,000) eliminates approximately $200/month in PMI.

2. Improve Your Credit Score

A higher credit score qualifies you for lower interest rates. The difference between a 680 and 740 credit score can be 0.5-1.0% in interest rate. On a $300,000 loan, a 0.75% rate difference equals about $150 per month—$54,000 over 30 years.

3. Buy Mortgage Points

Paying points (1 point = 1% of loan amount) upfront can reduce your interest rate by approximately 0.25% per point. Calculate your break-even point to see if it makes sense.

4. Shop for Better Insurance Rates

Homeowners insurance premiums can vary by hundreds of dollars for identical coverage. Get quotes from at least 3-5 insurers. Bundling home and auto insurance often provides discounts of 10-25%.

5. Consider a Longer Loan Term

While a 15-year mortgage saves on total interest, the higher monthly payments may strain your budget. A 30-year mortgage offers flexibility with lower required payments.

Note: Rates are approximate averages as of early 2025 and change daily. Always get personalized quotes from multiple lenders.

Typical Interest Rates by Loan Type

• 30-Year Fixed: 6.75-7.25%
• 15-Year Fixed: 6.25-6.75%
• 5/1 ARM: 6.50-7.00%
• FHA 30-Year Fixed: 6.50-7.00%
• VA 30-Year Fixed: 6.25-6.75%
• Jumbo 30-Year Fixed: 7.00-7.50%

What Affects Your Interest Rate?

• Credit Score: 740+ gets best rates; each 20-point drop can cost 0.25-0.50% more
• Down Payment: 20%+ down qualifies for better pricing
• Loan Type: Conventional typically beats FHA for good credit; VA often offers the best rates
• Loan Amount: Jumbo loans (above $766,550) typically cost 0.25-0.75% more
• Property Type: Single-family homes get best rates

Use Realistic Property Tax Estimates

Property taxes vary dramatically by location. Look up the actual tax rate for your target area on the county tax assessor’s website.

Don’t Forget Maintenance Costs

Budget 1-2% of your home’s value annually for maintenance and repairs. On a $400,000 home, that’s $4,000-$8,000 per year ($330-$665/month).

Factor in Utility Cost Changes

If you’re moving from an apartment to a larger house, expect utility bills to increase significantly.

Build in an Emergency Fund

Financial advisors recommend 6 months of expenses in emergency savings before buying. Homeownership brings unexpected expenses.

Calculate Your True Monthly Budget

Add your PITI + HOA + maintenance estimate + utilities + increased commuting costs. This “true” monthly housing cost should leave enough income for retirement savings, debt repayment, and quality of life.