What Is a Mortgage?
A mortgage is a secured loan used to purchase real estate. The property itself serves as collateral — meaning the lender can foreclose and sell the home if you fail to make payments. Mortgages are typically repaid over 15 or 30 years through fixed monthly payments that include both principal (the amount borrowed) and interest.
How Is a Mortgage Payment Calculated?
The core monthly payment (Principal & Interest) uses the standard loan amortization formula:
M = P × [r(1+r)^n] / [(1+r)^n – 1]
Where:
M = Monthly payment
P = Loan amount (Home price – Down payment)
r = Monthly interest rate (Annual rate ÷ 12 ÷ 100)
n = Total number of payments (Years × 12)
📌 Example: $400,000 Home, 20% Down, 7% Rate, 30 Years
Loan: $320,000 | Rate: 7% p.a. | Term: 30 years (360 payments)
Monthly rate r = 7 / 12 / 100 = 0.005833 | n = 360
Monthly P&I = 320,000 × [0.005833 × (1.005833)^360] / [(1.005833)^360 – 1]
≈ $2,129/month | Total paid ≈ $766,440 | Total interest ≈ $446,440
Key Mortgage Terms Explained
- Principal: The original amount you borrowed — does not include interest.
- Down Payment: The upfront cash you pay toward the home. The minimum is typically 3–20% of the purchase price.
- Interest Rate: The annual cost of borrowing, expressed as a percentage. Fixed rates stay constant; adjustable rates (ARM) can change.
- Loan Term: The number of years to repay. A 30-year term has lower monthly payments but far more total interest vs. a 15-year term.
- PMI (Private Mortgage Insurance): Required if your down payment is less than 20%. Protects the lender. Typically 0.5–1.5% of the loan amount annually.
- LTV (Loan-to-Value): Loan amount ÷ Home value. A lower LTV means better rates and no PMI requirement.
- Amortization: The process of paying off the loan through scheduled principal + interest payments. Early payments are mostly interest; later payments are mostly principal.
- Escrow: A portion of your monthly payment set aside by the lender to pay property taxes and home insurance on your behalf.
15-Year vs 30-Year Mortgage
- 30-Year Mortgage: Lower monthly payment (~40% less than 15-yr), but you pay roughly 2–2.5× more total interest over the life of the loan.
- 15-Year Mortgage: Higher monthly payment, but you build equity faster, pay far less interest, and own your home in half the time. Usually offers a lower interest rate too.
- Rule of thumb: If you can comfortably afford the higher 15-year payment, you save significantly. If cash flow is tight, 30 years gives flexibility.
How to Lower Your Mortgage Payment
- Make a larger down payment to reduce the loan principal
- Improve your credit score before applying (aim for 740+ for the best rates)
- Shop multiple lenders — even a 0.25% rate difference saves tens of thousands
- Choose a longer loan term (trade-off: more total interest paid)
- Make extra principal payments whenever possible — this dramatically shortens the loan
- Refinance when rates drop significantly below your current rate