Learn how mortgage payments work, what PITI means, how the 28/36 rule determines affordability, and whether a 15-year or 30-year mortgage is right for you.
What Makes Up Your Mortgage Payment?
A mortgage payment consists of four parts, often called PITI:
- Principal — The amount you borrowed
- Interest — The cost of borrowing (determined by your rate)
- Taxes — Annual property taxes (typically 1-2% of home value)
- Insurance — Homeowners insurance (protects against damage)
If your down payment is less than 20%, you'll also pay PMI (Private Mortgage Insurance).
📊 Real Example: $400K Home with 20% Down
| Component | Monthly Cost |
|---|---|
| Principal & Interest (6.5%, 30yr) | $2,022 |
| Property Taxes (1.2%/year) | $400 |
| Homeowners Insurance | $100 |
| Total Monthly Payment | $2,522 |
Required annual income (28% rule): $2,522 ÷ 0.28 × 12 = $108,000/year
The 28/36 Rule (Affordability Guide)
Lenders use the 28/36 rule to determine how much you can borrow:
- 28% Front-End Ratio: Housing costs ≤ 28% of gross monthly income
- 36% Back-End Ratio: Total debt payments ≤ 36% of gross monthly income
| Annual Income | Monthly Income | Max Housing (28%) | Max Debt (36%) |
|---|---|---|---|
| $80,000 | $6,667 | $1,867 | $2,400 |
| $120,000 | $10,000 | $2,800 | $3,600 |
| $180,000 | $15,000 | $4,200 | $5,400 |
| $250,000 | $20,833 | $5,833 | $7,500 |
15-Year vs 30-Year Mortgage
This is one of the most important decisions you'll make. Let's compare a $320,000 loan (after 20% down on $400K home) at 6.5%:
30-Year Mortgage
Payment: $2,022/month
Total Interest: $408,000
Total Cost: $728,000
✓ Lower monthly payment
15-Year Mortgage
Payment: $2,788/month
Total Interest: $222,000
Total Cost: $542,000
✓ Saves $186K in interest!
💡 The Sweet Spot: Make 30-year payments at a 15-year rate
Take a 30-year mortgage but make the 15-year payment. If you can't afford the 15-year payment every month, having the 30-year as a safety net gives you flexibility. In months when you can, pay extra.
Down Payment Strategies
| Down Payment | Amount ($400K Home) | PMI? | Monthly Payment |
|---|---|---|---|
| 5% | $20,000 | Yes | ~$2,850 (incl. PMI) |
| 10% | $40,000 | Yes | ~$2,700 (incl. PMI) |
| 20% | $80,000 | No | $2,522 |
| 30% | $120,000 | No | $2,207 |
Common Mortgage Mistakes
- Not shopping around for rates: Getting quotes from 3-5 lenders can save you 0.25-0.5% on your rate — that's $15K-$30K over 30 years on a $400K loan.
- Ignoring closing costs: Closing costs typically run 2-5% of the home price. On a $400K home, that's $8K-$20K in additional upfront costs.
- Maxing out your pre-approval: Just because a bank approves you for $500K doesn't mean you should spend that much. Stay below the 28% threshold for financial flexibility.
- Forgetting about maintenance: Budget 1-2% of home value annually for maintenance and repairs ($4K-$8K/year for a $400K home).