## How Does a US Mortgage Work?
A mortgage is a secured loan where your home serves as collateral. The lender gives you money to buy a property, and you repay it - with interest - over 15 to 30 years through monthly payments. Each payment covers two things: interest on your outstanding balance and principal reduction.
The mortgage payment formula: Monthly Payment = P × r × (1+r)^n / [(1+r)^n - 1]
Where P = loan amount, r = monthly rate (APR/12), n = total months.
Example: $350,000 mortgage at 7% for 30 years:
- Monthly payment = $2,329
- Total interest paid = $488,440
- Total cost = $838,440
Our free mortgage calculator handles all this instantly - plus gives you a full month-by-month amortization schedule.
## 15-Year vs 30-Year Mortgage: The $150,000 Question
This is the most important mortgage decision most homebuyers face.
| | 15-Year | 30-Year |
|---|---|---|
| Loan Amount | $350,000 | $350,000 |
| Interest Rate | 6.5% | 7.0% |
| Monthly Payment | $3,049 | $2,329 |
| Total Interest | $198,840 | $488,440 |
| Total Savings | $289,600 less interest! | - |
The 15-year saves nearly $290,000 in interest on a $350,000 loan. The catch: your monthly payment is $720 higher.
The smart compromise: Take a 30-year mortgage but pay extra principal each month. Pay $3,049 on a 30-year (as if it were a 15-year) and you'd pay off in about 18 years while retaining the flexibility to pay just $2,329 if times get tight.
## How Much House Can You Afford?
Use the 28/36 rule - the standard US lender guideline:
- 28% rule: Monthly housing costs (principal + interest + property tax + insurance + HOA) ≤ 28% of gross monthly income
- 36% rule: All monthly debt payments ≤ 36% of gross monthly income
| Annual Income | Max Housing Payment | Approx Loan Amount (7%, 30yr) |
|---|---|---|
| $60,000 | $1,400/month | ~$210,000 |
| $80,000 | $1,867/month | ~$280,000 |
| $100,000 | $2,333/month | ~$350,000 |
| $150,000 | $3,500/month | ~$525,000 |
## FHA vs Conventional vs VA Loans
### Conventional Loans
- Minimum credit score: 620 (740+ for best rates)
- Down payment: 3% minimum (20% to avoid PMI)
- No government backing
- Conforming loan limit: $766,550 (most areas, 2024)
### FHA Loans
- Minimum credit score: 580 (3.5% down) or 500 (10% down)
- Down payment: 3.5% minimum
- Government-backed by HUD
- Requires mortgage insurance premium (MIP) - often for loan life
- Loan limit: $498,257 base
### VA Loans (Veterans Only)
- Zero down payment
- No PMI - saving $100-300/month vs conventional
- Competitive interest rates
- Funding fee required (1.25-3.3%)
- Only for eligible veterans, active military, surviving spouses
Bottom line: If you're a veteran, VA loan is almost always best. If 580-619 credit score, FHA. If 620+ with 20% down, conventional wins.
## What is PMI and How to Avoid It?
PMI (Private Mortgage Insurance) is required on conventional loans with less than 20% down payment. It protects the lender - not you.
- Cost: 0.5-1.5% of loan amount annually
- On a $350,000 loan: $145-$438/month extra
- Total PMI paid (5 years at 1%): $17,500+ wasted
### How to Remove PMI:
1. Reach 20% equity through payments - request cancellation in writing
2. Home appreciation brings you to 20% - order an appraisal
3. Automatic cancellation at 22% equity (Homeowners Protection Act)
4. Refinance when rates drop and equity is 20%+
FHA loans have MIP (mortgage insurance premium) which may be permanent - another reason to target 20% down or refinance to conventional later.
## Mortgage Rates in 2026: What to Expect
Mortgage rates are driven by the 10-year Treasury yield, Federal Reserve policy, and economic conditions. In 2026:
- 30-year fixed: approximately 6.5-7.5% (varies by credit score, lender, loan type)
- 15-year fixed: approximately 6.0-7.0%
- 5/1 ARM: approximately 5.75-6.5% (adjusts after 5 years)
Rate shopping tip: Get quotes from at least 3 lenders within a 45-day window. All hard inquiries within 45 days count as one credit pull for mortgage purposes. This rate shopping alone can save $1,500-$5,000 over the loan life.
## How Extra Payments Can Save You Thousands
Making extra principal payments is one of the highest-return financial moves available.
On a $350,000 mortgage at 7% for 30 years ($2,329/month):
| Extra Monthly Payment | Years Saved | Interest Saved |
|---|---|---|
| $100/month extra | 3.5 years | $55,000 |
| $200/month extra | 6 years | $97,000 |
| $500/month extra | 11 years | $185,000 |
| One extra full payment/year | 5 years | $85,000 |
No prepayment penalty on most conventional, FHA, and VA mortgages. Always verify with your servicer, but federal law restricts prepayment penalties on most residential mortgages.
## When Does Refinancing Make Sense?
Refinancing replaces your current mortgage with a new one. It makes sense when:
1. You can lower your rate by 0.75%+ and plan to stay 2+ years
2. Break-even rule: Monthly savings × months to break even ≤ your planned stay
- Closing costs $5,000, save $200/month -> break even in 25 months
3. Switch from ARM to fixed for payment certainty as rates rise
4. Remove PMI after reaching 20% equity
5. Cash-out refi for home improvements (mortgage interest may be deductible)
Use our Loan Payoff Calculator to model your exact break-even timeline.
## The True Cost of Homeownership
Mortgage payment is just one component. Budget for:
| Cost | Typical Annual Amount |
|---|---|
| Property taxes | 1-2% of home value |
| Homeowners insurance | $1,200-$2,500/year |
| HOA fees (if applicable) | $200-$600/month |
| Maintenance & repairs | 1% of home value/year |
| PMI (if < 20% down) | 0.5-1.5% of loan/year |
On a $400,000 home, non-mortgage costs can easily add $600-$1,200/month. Factor this into your affordability calculation before buying.
## Using the Mortgage Calculator Effectively
Our free mortgage calculator lets you:
- Enter loan amount, interest rate, and term
- Add property tax, insurance, and PMI for true PITI payment
- See the complete amortization schedule month by month
- Compare 15-year vs 30-year side by side
- Model extra payment scenarios
Start with your target home price, subtract your down payment, and enter the resulting loan amount. Experiment with different rates to see how your payment changes and find the mortgage you can comfortably afford.