What Makes Up Your Mortgage Payment?
When most people say "mortgage payment," they're actually describing four components bundled into one monthly number — often abbreviated as PITI:
- Principal (P): The portion that reduces your loan balance
- Interest (I): The cost of borrowing money from the lender
- Taxes (T): Property taxes collected monthly and paid annually from your escrow account
- Insurance (I): Homeowners insurance premium, plus PMI if your equity is below 20%
When you refinance, only the principal and interest portion changes (assuming your property taxes and insurance stay the same). Understanding this split helps you estimate your new payment accurately.
Example PITI breakdown — $380,000 home, $280,000 loan at 6.50%
Total monthly payment: $2,172. The P&I portion ($1,697) changes when you refinance; taxes and insurance typically don't.
The Principal & Interest Formula
Your monthly P&I payment is calculated with the standard mortgage amortization formula. You don't need to memorize it, but understanding what drives it helps:
Where:
M = monthly payment
P = loan balance (principal)
r = monthly interest rate (annual rate ÷ 12)
n = number of monthly payments (years × 12)
For practical use: a free calculator handles this instantly. But knowing the formula means you understand why a higher balance, a higher rate, or a shorter term each push your payment up — and how refinancing manipulates all three.
Step-by-Step: Estimate Your New Payment
- Find your current payoff balance. This is your remaining mortgage balance — not your original loan amount. Check your last mortgage statement or log into your lender's portal.
- Determine your new loan balance. If you roll closing costs in, add them to the payoff balance. If you pay them out of pocket, the new balance equals the payoff balance.
- Identify the new rate and term. Use quotes from at least 3 lenders. Make sure you know whether the rate is fixed for the full term.
- Calculate new P&I. Use the formula or a calculator (below).
- Add taxes and insurance. These carry over from your current payment — check your current statement for the exact amounts. Taxes may change at your next annual assessment. Property tax rates vary widely by state — Texas averages 1.5–2.5% effective rate, while California is generally capped near 1.1% under Proposition 13. See the state refinance guide for your state's tax environment.
Worked Example: Before and After Refinancing
| Component | Current Loan (7.25%) | After Refinance (6.00%) |
|---|---|---|
| Loan balance | $280,000 | $287,500 (closing costs rolled in) |
| Interest rate | 7.25% | 6.00% |
| Term remaining | 24 years | 30 years (new) |
| Monthly P&I | $2,052 | $1,724 |
| Property taxes | $380 | $380 (unchanged) |
| Homeowners insurance | $95 | $95 (unchanged) |
| PMI | $0 (equity >20%) | $0 |
| Total monthly payment | $2,527 | $2,199 |
Monthly savings: $328/month. Note: extending from 24 to 30 years adds 6 years of payments. Always consider the term impact alongside the monthly savings.
How Loan Term Affects the Payment
The same loan balance at the same rate produces very different payments depending on the term. Choosing the right term is one of the most important refinancing decisions:
$280,000 at 6.00% — payment by term
A 10-year term pays the loan off fastest and has the lowest total interest — but the highest required payment. A 30-year term has the lowest payment but costs nearly twice as much in total interest over the life of the loan compared to the 15-year.
When Will Your Payment Go Up?
Most homeowners assume refinancing always lowers the payment. That's not guaranteed:
- Refinancing to a shorter term (e.g., 25 remaining years → 15-year refi) raises the required payment even at a lower rate, because you're paying the balance off faster.
- Rolling in large closing costs increases the loan balance and can raise the payment even if the rate drops.
- Removing PMI isn't free. If you had PMI that drops off on the new loan, your payment excluding PMI drops — but make sure to compare accurately.
- Escrow resets. When you close on a refinance, your lender sets up a new escrow account. You may see a slightly different taxes/insurance estimate in the first few months as the new account settles.
Accounting for PMI on the New Loan
If your home has appreciated since you bought it and you now have more than 20% equity, refinancing may eliminate PMI you're currently paying. This is a meaningful savings that doesn't show up in the rate comparison — it's separate from the P&I savings.
Conversely, if a cash-out refinance pushes your LTV above 80%, you may be required to pay PMI on the new loan. PMI typically costs 0.5–1.5% of the loan amount annually. On a $320,000 loan, that's $133–$400 per month added to your payment.
Using the Loan Estimate to Verify Your Payment
Within 3 business days of submitting a refinance application, lenders must provide a standardized Loan Estimate. Page 1 shows:
- Projected monthly payment (P&I + escrow)
- Loan amount and interest rate
- Estimated closing costs
- Cash to close (or cash back at closing)
Compare Loan Estimates side by side across multiple lenders. The payment shown on line 1 is the number that matters for your monthly budget. Read the full calculator guide to understand how to input these numbers and model your break-even.
Frequently Asked Questions
What is included in a mortgage payment?
Most mortgage payments bundle four items: Principal (reduces your balance), Interest (the borrowing cost), Taxes (property taxes escrowed monthly), and Insurance (homeowners insurance and PMI if applicable). Together these are called PITI. When you refinance, only P&I changes — taxes and insurance stay roughly the same.
How do I calculate my principal and interest payment?
The formula is M = P × [r(1+r)^n] / [(1+r)^n − 1], where P is the balance, r is the monthly rate (annual rate ÷ 12), and n is the total months. For a $280,000 loan at 6.0% for 30 years: monthly P&I = $1,679. Use our free calculator to avoid the arithmetic.
Will my mortgage payment go up if I refinance to a longer term?
Not necessarily — it depends on how much the rate drops. Refinancing from 7.25% into a new 30-year at 6.0% will likely lower your payment even though the term extends. But if you refinance from a 20-year remaining term into a 30-year at the same rate, your payment drops substantially while your total interest paid increases.
How do property taxes and insurance affect my payment?
They're added to your P&I to form the full PITI payment collected by your lender. They don't change when you refinance — they're tied to your property and insurance policy, not your loan. However, your lender may adjust the escrow estimate at closing based on current tax and insurance bills.
Calculate your new payment and see how much you'll save in under 60 seconds