How to Calculate Mortgage Payments — P&I, PMI & Amortisation

The Anatomy of a Mortgage Payment

Your total monthly housing cost is the sum of several key components:

The 5 Core Components

| Component | What It Covers | When Required | |-----------|----------------|---------------| | Principal & Interest (P&I) | Core loan repayment | Always | | Property Taxes | Local government taxes | Always (via escrow) | | Homeowners Insurance | Property protection | Always (via escrow) | | Private Mortgage Insurance (PMI) | Lender protection | Down payment < 20% | | HOA Fees | Community amenities | If applicable |

Remember: P&I is just the beginning—total housing costs include all components

1. Principal & Interest: The Amortisation Formula

The P&I payment is calculated using a standard amortisation formula for fixed-rate loans:

PMT = [P × r × (1 + r)ⁿ] / [(1 + r)ⁿ - 1]

Where:

• P = Loan amount (Home price – Down payment)
• r = Monthly interest rate (Annual rate ÷ 12)
• n = Total number of payments (Loan term in years × 12)

This formula ensures your P&I payment remains fixed for the entire loan term, but the split between principal and interest changes monthly.

💡 Key Insight: In early years, ~70–80% of your payment goes to interest; by year 10–12, it flips to mostly principal.

2. Escrow: Taxes and Insurance

Most lenders require you to pay 1/12th of your annual property tax and insurance bills each month into an escrow account. They pay these bills on your behalf when due.

• Property Taxes: Vary by location (e.g., £1,200/year → £100/month)
• Homeowners Insurance: Typically £300–£1,000/year → £25–£85/month

📌 Note: These are estimates—actual costs can change annually.

3. Private Mortgage Insurance (PMI)

If your down payment is less than 20%, you’ll pay PMI—typically 0.5%–1.5% of the loan amount per year.

• Monthly PMI = (Loan Amount × PMI Rate) ÷ 12
  Example: £200,000 loan at 0.6% → £100/month

PMI Removal:

• Automatic: At 78% LTV (loan-to-value) based on original schedule
• Requestable: At 80% LTV—you may need a new appraisal if your home has appreciated

4. Loan Term: 15-Year vs. 30-Year

| Feature | 30-Year Mortgage | 15-Year Mortgage | |--------|------------------|------------------| | Monthly Payment | Lower | 40–50% higher | | Interest Rate | Higher (e.g., 5.5%) | Lower (e.g., 4.75%) | | Total Interest | Much higher | 50–60% less | | Equity Buildup | Slower | Faster |

✅ Best for cash flow: 30-year
✅ Best for long-term savings: 15-year

5. The Power of Extra Payments

Adding even £50–£100/month to your payment can:

• Shorten loan term by 3–7 years
• Save tens of thousands in interest
• Build equity faster

Use an amortisation schedule to visualise the impact.

Pro Tips & Common Mistakes

• Aim for 20% down to avoid PMI entirely
• Get multiple Loan Estimates to compare true costs (including fees)
• Don’t ignore escrow analysis—lenders adjust your payment annually
• Refinance if rates drop—but calculate break-even on closing costs
• Never skip PMI cancellation—it’s your money once you hit 20% equity

Practical Applications

• Compare homes within your true affordability range
• Model “what-if” scenarios (e.g., rate changes, extra payments)
• Plan for future refinancing or overpayments
• Understand your amortisation schedule to track equity