How Mortgage Payments Work: P&I, Escrow and PMI Explained

You get the quote — $2,540 a month — but where does that number actually come from? Your mortgage payment is not one number but up to four bundled together: principal, interest, taxes and insurance. Lenders call it PITI, and understanding each slice is the difference between knowing your payment and merely paying it. This guide breaks down how each part is calculated, with a worked example on a $400,000 home. To run your own numbers, try our mortgage calculator.

Principal and Interest: The Core of the Payment

The biggest slice of your payment is principal and interest — P&I. The principal is the amount you borrowed. The interest is the lender's charge, calculated each month on the remaining balance. Your P&I payment is fixed for the life of a fixed-rate loan, and it comes from the amortization formula:

M = P × r(1+r)ⁿ / ((1+r)ⁿ − 1), where P is the loan amount, r the monthly interest rate, and n the number of payments.

Amortization is the clever part: although your payment stays the same, the mix inside it shifts. In the early years, the balance is high, so interest eats most of the payment and only a little principal gets repaid. Over time the balance shrinks, the interest slice shrinks with it, and more of each payment attacks the principal. On a 30-year loan, you pay the most interest in the first decade — which is why extra principal payments early on save so much over the life of the loan.

Escrow: Property Taxes and Homeowners Insurance

Most lenders will not let you forget your property taxes or let your insurance lapse, because both protect their collateral. Instead they collect estimated amounts with every monthly payment and hold them in an escrow account, then pay the bills on your behalf when they come due. This is the "T" and "I" in PITI.

Property tax varies enormously by location — roughly 1% of the home's value per year is a common national ballpark, but some states charge half that and others double. Homeowners insurance typically runs $1,500–$2,500 a year depending on the state and the home. Your lender estimates both, divides by 12, and adds them to your payment. Once a year they reconcile the escrow account: if taxes rose, your monthly payment goes up to cover the shortage.

PMI: The Cost of a Small Down Payment

Worked Example: A $400,000 Home

Let's put it together. You buy a $400,000 home with 20% down ($80,000), so the loan is $320,000 at 6.5% fixed for 30 years:

Notice that taxes and insurance add over $500 a month — nearly a quarter of the payment. First-time buyers who budget only for P&I are often surprised. If instead you put 10% down, PMI of roughly 0.5% a year would add about $150 a month on top, until you build enough equity to remove it.

What Can Change Your Payment Later

With a fixed-rate mortgage, P&I never changes — but the total payment can. Property tax reassessments are the most common cause of payment increases, followed by insurance premium hikes. Your lender's annual escrow analysis adjusts your payment to match. An adjustable-rate mortgage (ARM) is different: after the initial fixed period, the rate — and your P&I — resets with the market. And refinancing replaces the whole loan with a new one, resetting the payment, the rate and the amortization clock — you can model that scenario with our loan calculator.

Once the split between principal and interest makes sense, the natural next question is what happens when you pay ahead of schedule. Our guide to mortgage extra payments runs the numbers on paying a little extra each month versus a lump sum.

Frequently Asked Questions

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