How a US mortgage works
What you'll learn
Understand the 30-year fixed mortgage, the four parts of a monthly payment (PITI), and when PMI applies.
The classic US mortgage is the 30-year fixed: one interest rate, locked for the entire life of the loan. That makes America unusual. In most countries, including the UK, a "fix" lasts only a few years before the rate resets. An American buyer knows their principal-and-interest payment for three decades on day one.
What you actually pay each month: PITI
Your monthly payment usually bundles four things, known as PITI:
| Part | What it is | Fixed? |
|---|---|---|
| Principal | Repaying the loan itself | Amount shifts, rate does not |
| Interest | The cost of borrowing | Rate locked on a fixed loan |
| Taxes | Property taxes, collected via escrow | Can rise over time |
| Insurance | Homeowners insurance, via escrow | Can rise over time |
Early on, most of your payment is interest; over the years the balance tilts towards principal. And because taxes and insurance can climb, even a "fixed" mortgage payment can creep up.
PMI: the under-20% surcharge
Put down less than 20% on a conventional loan and you will usually pay private mortgage insurance (PMI), a monthly charge that protects the lender, not you. The 20% down payment is convention, not law - smaller down payments are common.
PMI is not forever. Under the Homeowners Protection Act you can request cancellation at 20% equity, and it must end automatically at 22% equity (78% of the home's original value) if your payments are current (verified with the CFPB, 2026 - check the current rules).
Closing costs
Completing the purchase brings one-off closing costs - lender fees, appraisal, title insurance, prepaid taxes. They land on top of the down payment, so the cash you need at closing is more than the down payment alone.
Key takeaways
- The US default is a 30-year fixed rate: locked for the whole loan, unlike short fixes elsewhere.
- A monthly payment is PITI: principal, interest, taxes and insurance.
- 20% down is convention, not law; under 20% usually means PMI until you reach 20-22% equity.
- Budget for closing costs on top of the down payment.
Illustrative only: a made-up split of a monthly mortgage payment into principal and interest, property taxes, homeowners insurance and PMI. Real proportions depend on your rate, location and down payment; this is not a quote or a forecast.
Frequently asked questions
Why is the 30-year fixed the American default?
US government-backed mortgage markets make it possible for lenders to offer a rate locked for the full 30 years. In many other countries, including the UK, rates are typically fixed for only two to five years before resetting.
Do I legally need a 20% down payment?
No. The 20% figure is a convention, not a law. Plenty of loans complete with far less down; putting down less than 20% on a conventional loan usually just means paying PMI until you build enough equity.
When does PMI go away?
Under the Homeowners Protection Act you can request cancellation once you reach 20% equity (80% of the home's original value), and the servicer must terminate it automatically at 22% equity (78%), provided your payments are current. Check the current rules with your servicer or the CFPB.
What are closing costs?
One-off fees due when the purchase completes - things like lender fees, appraisal, title insurance and prepaid taxes. They come on top of the down payment, so budget for both.
General information, not financial advice. The value of investments can fall as well as rise, and figures and rules can change; check the current position before acting.