How a mortgage payment works
A monthly house payment is usually more than the loan payment. Lenders often call it PITI: principal, interest, taxes, and insurance. Mortgage insurance or a guarantee fee, and HOA dues, can sit on top.
What makes up a mortgage payment (PITI)
| Piece | What it is | Where the number comes from |
|---|---|---|
| Principal | The part of each payment that pays down the loan balance. | The amortization schedule. |
| Interest | The cost of borrowing, charged on the remaining balance each month. | Your note rate (from your lender). |
| Taxes | Property taxes, usually collected monthly into an escrow account. | Your local taxing units and appraisal district. |
| Insurance | Homeowner’s insurance (and flood insurance where required). | Your insurance quote. |
| Mortgage insurance or fee | PMI on many conventional loans, FHA MIP, or the USDA annual fee. VA has a one-time funding fee instead. | The program’s published rules. See Mortgage insurance explained. |
| HOA dues | Homeowners association dues, if the home has them. Usually paid separately, but lenders count them in the housing payment. | The HOA. |
The principal and interest formula
A fixed-rate loan uses the standard amortization formula:
Monthly P&I = P × r ÷ (1 − (1 + r)−n)
P = loan amount, r = your annual rate ÷ 100 ÷ 12, n = number of monthly payments (years × 12).
Early payments are mostly interest because interest is charged on a large balance. Each month the balance falls a little, so more of the same payment goes to principal. Try it with your own rate in the payment calculator. To see how every payment splits, use the amortization calculator; to see what paying extra does, use the extra payments calculator.
Escrow accounts
Most lenders collect taxes and insurance monthly and pay the bills from an escrow account. Federal rules (Regulation X) set limits on how that account works:
- The servicer may hold a cushion of no more than one-sixth of the year’s estimated escrow payments.
- The account is analyzed every year, and the payment is adjusted up or down.
- A shortage of less than one month’s escrow payment may be left alone, collected within 30 days, or spread over at least 12 months. A shortage of one month or more may be left alone or spread over at least 12 months.
- A surplus of $50 or more is refunded within 30 days if the borrower is current.
- For newly built homes that haven’t been fully assessed, the servicer may base the tax estimate on comparable properties.
Why a new home’s payment can jump
On a newly built home, the first tax figure in escrow can come from a value set before the house was finished. When the finished home is valued, the tax bill can rise, the escrow analysis can find a shortage, and the payment can go up. See The new-build escrow jump and try the escrow jump calculator.
Property-tax exemptions change the tax line
Exemptions lower the taxable value, which lowers the tax piece of PITI once they are on the tax roll. Each state sets its own exemptions by law. Pick a state to see examples from that state’s statute or, where noted, its revenue department’s official guidance.
California
- The homeowners’ property tax exemption is $7,000 of the dwelling’s full value, for a home the owner occupies as their principal place of residence on the lien date.
- It doesn’t apply to property that is rented, vacant, or still being built on the lien date, to a vacation or second home, or when the owner receives the veterans’ exemption.
Florida
- A person who holds title on January 1 and makes the property their permanent residence is exempt from all taxation, except assessments for special benefits, up to $25,000 of assessed value.
- An additional exemption of up to $25,000 applies to assessed value above $50,000, for all levies other than school district levies. The law adjusts that additional $25,000 for inflation each January 1, so the current amount can be higher; ask the county property appraiser.
Changing for 2027. Florida voters passed Amendment 3 on November 3, 2026. It takes effect January 1, 2027, and first applies to the 2027 tax roll. The amounts above are from the 2026 statute. Under the amended constitution:
- School district levies: up to $25,000 of assessed value, as before.
- All other levies: up to $150,000 of assessed value beginning January 1, 2027, and up to $250,000 beginning January 1, 2028, adjusted for inflation each year beginning in 2029.
- Someone who wasn’t a Florida resident as of December 31, 2026 gets $25,000 for school levies and up to $50,000 for other levies, and becomes eligible for the larger exemption beginning with the fifth year of exemption.
These amounts first apply on the 2027 tax roll. See how Florida values a home after a sale.
Georgia
- Generally, a homestead exemption is available when the home was owned by the homeowner and was their legal residence as of January 1 of the taxable year. Applications go to county tax officials by April 1, or up to the end of the 45-day window to appeal the assessment notice.
- The standard homestead exemption is $2,000 from county and school taxes (except school taxes levied by municipalities and taxes to pay bonded debt), deducted from the 40% assessed value.
- Owners 65 or older may claim a $4,000 exemption from all county taxes if the income of the owner and spouse didn’t exceed $10,000 for the prior year (retirement, pension, and disability income are excluded up to a Social Security-based maximum).
- Many counties have their own local homestead exemptions, so the county tax office has the full list.
From the Georgia Department of Revenue’s guidance, which cites the Official Code of Georgia.
Illinois
- The general homestead exemption reduces a home’s equalized assessed value by the increase above its 1977 equalized assessed value, up to a maximum. For taxable years 2023 and later, the maximum is $10,000 in counties with 3,000,000 or more inhabitants, $8,000 in counties next to such a county, and $6,000 in all other counties.
- When a home sells, the exemption stays in effect for the rest of that assessment year. The new owner may need to apply (or reapply) for following years.
Michigan
- A principal residence is exempt from the tax a local school district levies for school operating purposes, to the extent set by the state school code.
- The owner claims it by filing an affidavit with the local tax collecting unit, by June 1 for the next summer tax levy or by November 1 for the next winter tax levy.
New York
- The School Tax Relief (STAR) benefit comes as a STAR credit (a check or direct deposit to use toward school taxes) or a STAR exemption (a reduction on the school tax bill). The STAR exemption is no longer available to new homeowners; owners who have received it since 2015 can keep it for the same primary residence.
- Basic STAR has no age restriction. The income limit is $500,000 or less for the STAR credit and $250,000 or less for the STAR exemption.
- Enhanced STAR requires at least one resident owner who is 65 or older by December 31 of the benefit year, with income of $110,750 or less for 2026 benefits or $113,550 or less for 2027 benefits.
From the New York State Department of Taxation and Finance’s guidance.
North Carolina
- For an owner who is 65 or older, or totally and permanently disabled, and whose income is within the statute’s limit, part of the residence’s appraised value is excluded from tax: the greater of $25,000 or 50% of the appraised value. An owner who gets this exclusion can’t get other property tax relief.
- The income limit was $25,000 for the taxable year beginning July 1, 2008, and is adjusted each year by the Social Security cost-of-living adjustment.
Ohio
- The homestead reduction applies to an owner-occupied home of a person who is 65 or older or permanently and totally disabled, or of a surviving spouse who was at least 59 when the spouse who received it died.
- The reduction is figured from $25,000 of the home’s true value (adjusted under the statute), times the assessment percentage and the effective tax rate.
- People not covered by the statute’s earlier-year rules must have total income of no more than $30,000, as adjusted under the statute.
Pennsylvania
- A local governing body may exclude a fixed dollar amount of the assessed value of each homestead from taxation.Source: 53 Pa.C.S. §8583 (exclusion for homestead property) · checked Nov 10, 2026 The exclusion can’t exceed one-half of the median assessed value of homestead property in that political subdivision.Source: 53 Pa.C.S. §8586(a) (limit on exclusion) · checked Nov 10, 2026
- Applications are filed with the assessor by March 1 (in a city of the first class, by a date the governing body sets, no later than December 1 of the year before).Source: 53 Pa.C.S. §8584(b) (filing deadlines) · checked Nov 10, 2026
- Because each local body sets its own amount, no dollar figure is shown here.
Texas
- The general residence homestead exemption from school district taxes is $140,000, with an additional $60,000 for owners who are 65 or older or disabled.Source: Texas Tax Code §11.13(b), (c) (residence homestead) · checked Nov 10, 2026
- A veteran who receives 100% service-connected disability compensation and has a 100% disability rating or individual unemployability can have the total appraised value of the residence homestead exempted. A surviving spouse who hasn’t remarried can keep it.Source: Texas Tax Code §11.131 (100% disabled veteran homestead) · checked Nov 10, 2026
Lenders may estimate taxes at the full amount until an exemption shows on the roll. Ask your lender how they estimated it.
Adjustable-rate mortgages (ARMs)
An ARM has a fixed starting rate for a set period, then adjusts based on an index plus a margin. Caps limit how much the rate can rise at each adjustment and over the life of the loan. FHA’s published caps:
| FHA ARM type | Caps (per adjustment / lifetime) |
|---|---|
| 1-year and 3-year | 1 point / 5 points |
| 5-year | 1 / 5, or 2 / 6 |
| 7-year and 10-year | 2 / 6 |
FHA ARM indexes are the 1-year Constant Maturity Treasury or the 30-day average SOFR.
Source: HUD Handbook 4000.1, II.A.8 (Section 251 adjustable rate mortgages) · checked Nov 10, 2026Worst-case walkthrough (no rate assumed)
Call the starting rate R. On an FHA 7-year ARM with 2 / 6 caps, the most the rate can be is:
- Years 1–7: R (fixed period).
- After the first adjustment: R + 2 points.
- After the second adjustment: R + 4 points.
- Any later year: never above R + 6 points (the lifetime cap).
To see what that means in dollars, enter your own starting rate and caps in the ARM worst-case calculator. For more on caps and where they appear on the Loan Estimate, see ARMs: the worst case under the caps.
The rate used for DTI on an ARM
Fannie Mae sets the rate lenders must use when calculating the payment for the debt-to-income ratio on an ARM: for an initial fixed period of 3 years or less, the highest rate possible in the first 5 years; for a 5-year fixed period, the greater of the note rate plus the first change cap or the fully indexed rate; for longer fixed periods, at least the note rate.
Source: Fannie Mae Selling Guide B3-6-04, Qualifying Payment Requirements · checked Nov 10, 2026The CFPB’s ARM booklet explains indexes, margins, and caps in more depth.Source: CFPB: “Adjustable-Rate Mortgages” booklet (Consumer Handbook on Adjustable-Rate Mortgages, last updated September 2026) · checked Nov 10, 2026
Seeing the final numbers before closing
Federal rules require that you receive the Closing Disclosure at least 3 business days before consummation, so you can compare the final payment and costs with your Loan Estimate.
Source: 12 CFR 1026.19 (Regulation Z, Closing Disclosure timing) · checked Nov 10, 2026How the days are counted, which changes restart the wait, and a comparison checklist: Loan Estimate vs. Closing Disclosure.
Guidelines change; confirm with a licensed lender.