Mortgage taxes, insurance and PMI

What a payment actually contains

A $400,000 home financed at 6.5%, with property tax at 1.1%, homeowners insurance at $1,800 a year and PMI at 0.5% of the loan:

Only the first line builds equity. The other $684 buys services and protection, and it is the part that varies most by location — property tax alone ranges from under 0.3% to over 2% of value depending on the state.

Why it arrives as one number

Most lenders collect tax and insurance through an escrow account, dividing the annual bills by twelve and holding the money until they fall due. That is why the payment looks like a single figure and why it can change even on a fixed-rate mortgage: when the tax assessment or insurance premium moves, the escrow portion moves with it.

An escrow shortage after a reassessment can raise a monthly payment by a hundred dollars or more with no change to the loan at all. Fixed rate does not mean fixed payment.

PMI is the one you can remove

Private mortgage insurance protects the lender, not you, and it is usually required when the loan exceeds 80% of property value. It is also the only line here you can eliminate deliberately.

On a conventional loan it generally cancels once the balance reaches 80% of the original value, and lenders are typically required to end it automatically at 78%. Reaching that point sooner through extra principal is worth more than the interest saved: $167 a month removed is $167, whereas $167 of extra principal saves only the interest on it.

Two cautions. FHA mortgage insurance often runs for the life of the loan regardless of equity, so removing it usually means refinancing. And cancellation is normally measured against the original value, not today's — rising prices alone may not be enough without an appraisal.

Which number to use where

Compare loans on principal and interest, because that is the only part the loan controls and the only fair basis for judging two offers.

Budget and qualify on the full figure. Lenders assess the whole housing cost against your income, so a high-tax area reduces how much house you can buy on identical income — the payment ceiling is the same, and more of it goes to the county.

Estimate the real payment

The mortgage calculator takes taxes, insurance, PMI and HOA inputs and keeps principal and interest visible separately. The loan-to-value calculator shows how close you are to the PMI cancellation threshold.

Related reading: how mortgage payments work and closing costs explained.

What escrow adds to the payment

Principal and interest are only part of what leaves the account. The rest varies by location more than by loan.

The same loan costs seven hundred dollars a month more in a high-tax area. Affordability decided on principal and interest alone will be wrong by that much.

Common questions

Related reading

The rest of this series, and the calculators that let you run the idea on your own numbers.

More mortgage guides

• How mortgage payments work — A $400,000 mortgage at 6.5% costs about $2,528 a month — and $2,167 of the first payment is interest. Here is where every dollar goes.
• Mortgage amortization explained — On a 30-year mortgage you do not pay more principal than interest until around year 19. Here is why, and what the schedule actually shows.
• Extra mortgage payments explained — An extra $200 a month on a $400,000 mortgage cuts about five and a half years and $111,000 of interest. Why timing matters more than size.
• Closing costs explained — Closing costs typically run 2% to 5% of the price — $8,000 to $20,000 on a $400,000 home. What is a fee, what is prepaid, and what you can negotiate.

Try it with your figures

• Mortgage Calculator
• Mortgage Amortization Calculator
• Extra Payment Calculator
• Closing Costs Calculator

See also all guides, every calculator, and the calculation methodology behind these estimates.