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Understanding the True Costs of a Mortgage

  1. Principal: the mortgage loan amount to be repaid
  2. Interest: cost lenders charge for use of the money
  3. Taxes: local government tax assessments on the property
  4. Insurance: to replace the home in the event of a disaster
(you can learn more - links scroll to information below)
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True Costs of a Mortgage:

Understanding Escrow

The total cost of a mortgage has four elements:

  1. Principal
    represents the amount you borrow, which has to be repaid over time.

  2. Interest
    is the cost that lenders charge for the use of their money during

  3. Taxes
    is an assessment that local governments collect on property to pay for local services. Property tax rates will vary by location and can affect your total cost and affordability

  4. Homeowners Insurance
    will be required to replace the value of the loan in the event of a disaster such as fire, earthquake, flood, etc.


These four cost components
equals the monthly mortgage payment you will pay each month:

Principal + Interest + Taxes + Insurance (PITI)

= Total Cost of Your Mortgage Loan

Many times buyers ignore these additional costs when figuring how much of a home they can afford.

Payment Ratio
PITI is part of the formula that lenders use when calculating your affordability ratios.

see our discussion on affordability ratios


Property taxes and insurance costs must be collected and paid when they are due.

In most cases, lenders will make the collection by allocating each month to your mortgage payment the amount you need to pay for taxes and insurance.


These collections are placed in escrow, a depository account that the bank manages.

Your total monthly payment will include payments for real estate taxes, insurance, and Private Mortgage Insurance (PMI) and other items that are placed in escrow and used to pay taxes, insurance, PMI and other items on your behalf when they come due.


Note that the escrow portion of your monthly payment may increase or decrease,

depending on the change of your taxes and insurance assessments.

If your mortgage does not have an escrow account, you will be required to pay your taxes and insurance separately and show proof of payment to your lender.

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True Costs of a Mortgage :

Local Property Taxes

Your county and city may levy taxes on your property.

These taxes pay for government services such as schools, roads, police, and other community services.

Information on property tax use:


The annual tax is usually calculated as a percentage (factor) of your property's appraised market value.

For example, an assessment may look like this:

  • $0.94 per $100 in appraised value
  • this calculates into a tax factor of 0.94% on the appraised value of your home

Contact your local community and county officials to determine your county and city tax factor.

Lookup county and city governments:


Many of these local real estate taxes may qualify for tax deductions.

Check with your tax advisor for more information.

Deductibility of real estate taxes:

Publication 530: Tax Information for First-Time Homeowners:

Download Publication 530:

Download IRS1040, Schedule A: Itemized Deductions:


At your home closing, you will be required to prepay up to one year's cost of your property tax.

Then each month, your loan payment will include 1/12 of the annual property tax that will be deposited in your escrow account until the property tax payment is due.

Estimate your tax payments:
your input will be used to calculate your
monthly escrow below

County tax factor (enter as .00XX):
City estimated tax factor:
Other estimated tax factor:
Appraised home market value:
this calculation to be added below

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True Costs of a Mortgage:

Homeowners Insurance

You may be required to carry hazardous insurance on your home

in the event of a fire, flood, disaster, and any other natural disaster that destroys or partially destroys your home.

The insurance will protect your investment (and the lender's) and repair any damage that may occur. The annual premium may vary depending on your home area and location. You must provide proof of insurance before closing and settlement.

Looking for hazard insurance for your home?

Analyze insurance companies:
Receive home insurance quote:

another insurance quote listing:


At your closing, you may be required to prepay up to one year's cost of hazardous insurance.

Then each month your loan payment will include 1/12 of the annual hazard insurance premium to be deposited in your escrow account until payment is due.

Estimate your insurance costs:
input will be used to calculate your
total monthly payment below:

Annual Cost of Insurance:
this calculation to be added below

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True Costs of a Mortgage:

Other Monthly Costs

There may be other associated costs that may be included in your escrow payment such as Private Mortgage Insurance, tax liens if any, etc. Check with your real estate agent or your legal council to determine what other charges may apply.


Private Mortgage Insurance (PMI) is mortgage default insurance that is required for all conventional mortgage loans with less than a 20% down payment.

It is designed to pay the lender a portion of the outstanding balance of a loan in the event the homeowner defaults.

for more information about PMI: about PMI

If PMI is required as part of your loan, the initial annual premium will be included in your closing costs while your subsequent premiums (1/12th of your annual premium) will be included in your monthly mortgage payments and deposited in your escrow account.

You need to check with your lender to estimate your cost percentage for PMI if your down payment is less than 20%. Nationally, the average annual percentage is around 0.005 of your loan balance.

Estimate your PMI costs, if any:
input will be used to calculate your
total monthly payment below

Annual Factor for PMI Insurance:
this calculation to be added below

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True Costs of a Mortgage:

Estimating Your Actual Monthly Costs

You can use the calculation below to estimate your total mortgage cost.

Your monthly mortgage and escrow payment will be the total cost each month for your home purchase.

First, Calculate Your Monthly Mortgage Payment:
Enter the amount to be borrowed: $
Enter the Repayment Terms: (1)  
Enter Your Quoted Interest Rate %:   %
Monthly Mortgage Payment:  $
Next, Calculate Your Monthly Escrow Payment:
(input from above)
Est. Monthly Tax:
Est. Monthly Insurance:
Est. Monthly PMI:
Monthly Payment for Escrow: $
Total Monthly Payment: $

(1) Repayment terms are the number of months in your loan. These calculations are based upon the assumptions you entered. Please note that rounding error may make a small difference in calculations. The accuracy of the calculation and the circumstances which you may qualify may result in different calculations.

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