How Do Mortgage Payments Work?
A standard fixed-rate mortgage payment is split into two parts: principal and interest. In the early years, the majority of each payment goes toward interest. Over time, as the loan balance decreases, more of your payment is applied to principal. This process is called amortization.
For real estate investors, understanding mortgage amortization is critical. While your tenants pay down the loan through rent payments, you are building equity each month — even if your cash flow is modest. This "phantom return" from loan paydown is one of the key wealth-building advantages of leveraged real estate.
Fixed Rate vs. Adjustable Rate Mortgages
Fixed-rate mortgages lock in your interest rate for the entire loan term (typically 15 or 30 years). Your monthly payment stays the same, making budgeting predictable. This is the most common choice for long-term rental property investors.
Adjustable-rate mortgages (ARMs) start with a lower introductory rate that resets periodically (e.g., 5/1 ARM adjusts after 5 years, then annually). ARMs can be advantageous for fix-and-flip investors or those planning to refinance or sell within the introductory period. However, they carry the risk of significantly higher payments if rates rise.
Tips for Real Estate Investors
Factor in all costs
Your monthly mortgage is just one part of your total expense. Include property taxes, insurance, maintenance, vacancy, and management when evaluating cash flow.
Compare 15-year vs. 30-year terms
A 15-year mortgage has higher monthly payments but saves tens of thousands in interest. A 30-year mortgage maximizes monthly cash flow. Run both scenarios to see what works for your strategy.
Understand DSCR for investment loans
Lenders for investment properties often use the Debt Service Coverage Ratio (DSCR) — your NOI divided by annual mortgage payments. Most require a DSCR of at least 1.2 to 1.25.
Leverage boosts returns (and risk)
A smaller down payment means more leverage — which amplifies both gains and losses. With 20% down on a property that appreciates 3%, your equity grows by 15%. Model different scenarios with Proformatic.
Frequently Asked Questions
How is the monthly payment calculated?
We use the standard amortization formula: M = P[r(1+r)^n] / [(1+r)^n - 1], where P is the loan principal, r is the monthly interest rate (annual rate divided by 12), and n is the total number of monthly payments (years times 12).
Does this include taxes and insurance?
No, this calculator shows the principal and interest (P&I) portion only. Your actual monthly housing payment will also include property taxes, homeowner's insurance, and potentially PMI (if your down payment is less than 20%) or HOA fees.
What is amortization?
Amortization is the process of paying off a loan through regular scheduled payments. Each payment covers interest on the remaining balance plus a portion of the principal. Early payments are interest-heavy; later payments are principal-heavy.
Should I put 20% or 25% down on an investment property?
Most conventional lenders require 20-25% down for investment properties. Putting more down lowers your monthly payment and may get you a better rate, but it also ties up more cash. Analyze the cash on cash return for both scenarios to decide.