The list price of a home is not the number that determines whether it is affordable. The monthly payment is, and the monthly payment depends on principal, interest, taxes, insurance, and several smaller line items that vary substantially by location and loan type. Here is what each piece is and how to size them.
What the Payment Actually Includes
Lenders refer to the full housing payment as PITI: principal, interest, taxes, and insurance. Buyers who model only principal and interest tend to underestimate the monthly cost by hundreds of dollars.
- Principal and interest. The portion calculated by a standard amortization schedule from the loan amount, rate, and term.
- Property taxes. Effective rates range from roughly 0.3 percent of home value annually (Hawaii, Alabama) to over 2 percent (New Jersey, Illinois, parts of Texas and Connecticut). On a $500,000 home that is a $9,000+ annual swing.
- Homeowners insurance. Typically $1,200 to $4,000 per year, depending on state, coverage, and exposure to wind, wildfire, or flood. Premiums in parts of Florida, Louisiana, and California have risen well above the national median in recent renewal cycles.
- PMI. Conventional loans with less than 20 percent down typically add 0.3 to 1.5 percent of the loan amount per year, billed monthly, until the loan-to-value ratio reaches 80 percent.
- HOA dues. Not part of PITI but counted by lenders against qualifying ratios. Condo and planned-community dues commonly run $200 to $800 per month.
The 28/36 Rule
The conventional affordability guideline is that PITI should not exceed 28 percent of gross monthly income, and total debt payments should not exceed 36 percent. Lenders will commonly approve well above these thresholds, up to 45 to 50 percent debt-to-income on conventional loans and higher on FHA, but approval and affordability are not the same thing.
At a 43 percent DTI, very little gross income remains for retirement contributions, emergency reserves, or discretionary spending. Sizing the loan to the lifestyle the household actually wants, rather than the maximum the lender will allow, is the more durable approach.
Down Payment Options
The 20 percent down convention is widely cited but no longer required. The relevant question is the trade-off between down payment size, mortgage insurance, and rate.
- 3 to 5 percent down: Conventional low-down-payment programs (Fannie Mae HomeReady, Freddie Mac Home Possible). Requires PMI.
- 3.5 percent down: FHA. More flexible credit requirements; on most current FHA loans, mortgage insurance lasts the life of the loan unless the borrower refinances out.
- 0 percent down: VA for eligible veterans, USDA for eligible rural properties. No monthly mortgage insurance. VA carries a one-time funding fee.
- 10 to 15 percent down: Still requires PMI, but at a meaningfully lower monthly rate than at 3 to 5 percent down.
- 20 percent down: No PMI, lowest available rate, strongest offer posture in competitive markets.
In an appreciating market, the cost of waiting to save 20 percent can exceed the cost of paying PMI in the meantime. In a flat or declining market, the calculation reverses. The right answer depends on the local trajectory and the household's timeline.
Closing Costs and Reserves
Plan for 2 to 5 percent of the purchase price in closing costs, covering lender origination, title insurance, appraisal, recording fees, prepaid escrows, and prorated taxes. On a $400,000 home, that is $8,000 to $20,000 due at closing in addition to the down payment.
Underwriting also looks for 2 to 6 months of post-closing reserves, meaning liquid assets equal to several months of PITI remaining after closing. Draining every account to close can complicate or delay underwriting approval.
Loan Types
- Conventional 30-year fixed: The default choice. Predictable payments, broad availability, and the most competitive rates for borrowers with strong credit and reasonable down payments.
- Conventional 15-year fixed: Rate typically 0.5 to 0.75 percent lower than the 30-year, with a substantially higher monthly payment. Faster equity accumulation if the budget supports it.
- ARM (5/6, 7/6, 10/6): Fixed for the first 5, 7, or 10 years, then adjusts periodically. Useful when the borrower has a clear plan to sell or refinance inside the fixed window.
- FHA: Credit scores as low as 580, 3.5 percent down. Lifetime mortgage insurance on most current loans, so generally treated as a path into a first home with the expectation of refinancing later.
- VA: For eligible veterans. Zero down, no PMI, competitive rates, flexible DTI limits.
- Jumbo: Above the conforming loan limit ($806,500 in most counties for 2025, higher in designated high-cost areas). Stricter credit and reserve requirements; pricing in 2025 has often been competitive with conforming rates for strong borrowers.
Pre-Qualification vs. Pre-Approval
Pre-qualification is an informal estimate based on stated information. Pre-approval involves a credit pull, income verification, and an underwriter's conditional commitment. In most competitive markets, sellers expect to see a pre-approval letter before considering an offer.
Shopping Rates
Credit bureaus treat multiple mortgage inquiries within a 14 to 45 day window as a single inquiry. The practical implication is that a borrower can collect three or more Loan Estimates on the same day and compare them line by line without compounding credit-score impact.
Compare APR, not just the headline rate. APR includes origination fees, points, and most lender costs, and is the standardized comparison number on the Loan Estimate. A 0.25 percent APR difference on a $400,000 loan is roughly $20,000 over 30 years.