When you first look at a mortgage, it’s tempting to focus only on the monthly payment. But the true cost of a mortgage goes far beyond that number. Over the life of the loan, you’ll pay not just the principal, but also interest, taxes, insurance, and potentially private mortgage insurance (PMI). For a full breakdown of mortgage strategies, check out our Guide to calculating loan
This guide walks you through how to calculate the total cost of your mortgage over time so you can make informed financial decisions.
1. Start with Principal and Interest
The base of your mortgage payment is principal + interest. Use the standard formula:
M = P × [ r × (1 + r)^n ] / [ (1 + r)^n – 1 ]
Where:
M = Monthly payment
P = Loan principal
r = Monthly interest rate (annual ÷ 12)
n = Number of payments (years × 12)
Example:
Loan = $250,000
Rate = 6% (0.005 monthly)
Term = 30 years (360 payments)
Payment = ≈ $1,499/month
Over 30 years, total payments = $1,499 × 360 = $539,640
Of that, $289,640 is interest alone.
2. Add Property Taxes
Property taxes vary by location but can add thousands each year.
Example:
Annual taxes = $3,600
Monthly = $300
Over 30 years = $108,000
3. Add Homeowners Insurance
Most lenders require insurance.
Example:
Annual premium = $1,200
Monthly = $100
Over 30 years = $36,000
4. Add PMI (If Applicable)
If your down payment is less than 20%, PMI usually applies until you reach 20% equity.
Example:
Loan = $250,000, Down = 10% ($25,000)
PMI = 0.5% annually → $1,125/year = $93.75/month
Assume PMI for 8 years → ≈ $10,800 total
5. Include Closing Costs and Fees
Upfront costs (2–5% of loan amount) should also be included in your true cost.
Example:
Closing costs = $5,000
6. The Full True Cost Example
Let’s add everything together for a $250,000 loan over 30 years:
Principal & Interest: $539,640
Taxes: $108,000
Insurance: $36,000
PMI: $10,800
Closing Costs: $5,000
True Cost = $699,440
That’s nearly 3x the original loan amount once everything is factored in.
7. How to Reduce Your True Cost
Make extra principal payments to cut interest.
Choose a shorter term (15 or 20 years) to reduce interest dramatically.
Refinance if rates drop.
Increase your down payment to avoid PMI.
Shop around for insurance and taxes where possible.
Conclusion
The true cost of a mortgage isn’t just your monthly payment—it’s the sum of principal, interest, taxes, insurance, PMI, and fees over time. By calculating the full picture, you can budget more accurately and make smarter decisions about loan terms, refinancing, and payoff strategies.