US fixed-rate mortgages: principal, interest and escrow
Understand the parts of a US mortgage payment and why a fixed interest rate does not fix every housing cost. Includes an illustrative calculator example.
- Principal
- Repayment of the amount borrowedCFPB, mortgage payment components
- Interest
- The lender's charge for lending moneyCFPB, mortgage payment components
- Escrow
- Amounts collected for taxes and homeowners insuranceCFPB, mortgage payment components
Principal and interest
Principal repays the amount borrowed; interest is the lender's charge for the loan. A fixed-rate repayment illustration holds the interest rate constant over the term. The principal-and-interest amount is only part of the possible monthly cost, rather than a complete housing budget. CFPB, mortgage payment components (opens in a new tab).
Escrow and PMI
An escrow account collects amounts for property taxes and homeowners insurance, which the mortgage company holds until bills are due. Private mortgage insurance premiums, where required, can also be part of the payment. Escrow can change even when principal and interest remain level. Without escrow, taxes and homeowners insurance are paid separately. Homeowners-association fees are usually separate from the mortgage payment. CFPB, mortgage payment components (opens in a new tab).
Worked example
Worked example using the money.financial calculator. Illustrative inputs are a $240,000 loan, 6% annual interest and a 30-year term, with monthly payments selected. The calculator returns $1,438.92 monthly principal and interest. These are chosen assumptions, not quoted lending terms. The calculator uses the entered loan amount, interest rate, term and payment frequency; it does not calculate property taxes, escrow or mortgage insurance. The illustration excludes homeowners insurance, flood insurance, points, lender fees, HOA dues and special assessments, and future changes in taxes or costs. It is not a complete escrow or lender payment quote. Figures from the US mortgage payment calculator (opens in a new tab).