How Mortgage Payments Are Calculated
A plain-English guide to the mortgage payment formula, with a worked example and what else goes into your monthly housing cost.
The short version
A standard fixed-rate mortgage payment is the same amount every month for the life of the loan. That amount is set so that, after the final payment, the balance is exactly zero. Early payments are mostly interest; later payments are mostly principal. Understanding the formula helps you see why a small change in the interest rate or loan term can change what you pay by tens of thousands of dollars.
The mortgage payment formula
The monthly payment (M) for principal and interest is:
M = P × r × (1 + r)n / ((1 + r)n − 1)
- P is the loan amount: the home price minus your down payment.
- r is the monthly interest rate: the annual rate divided by 12. For example, 6.5% a year is 0.065 / 12 = 0.005417 per month.
- n is the total number of monthly payments: the term in years times 12. A 30-year loan has 360 payments.
A worked example
Suppose you borrow $300,000 at 6.5% for 30 years. Then r = 0.005417 and n = 360. Plugging these into the formula gives a monthly payment of about $1,896.
Over 360 payments that adds up to roughly $682,600. About $382,600 of that is interest, which is more than the amount you originally borrowed.
How each payment is split
In the first month, interest is the balance times the monthly rate: $300,000 × 0.005417 = $1,625. The rest of the payment, about $271, reduces the principal. The next month the balance is slightly lower, so slightly less interest is charged and slightly more goes to principal. This gradual shift is called amortization. It is why you build equity slowly in the early years and faster later on.
What else is in your monthly housing cost
The formula covers only principal and interest. Most homeowners also pay:
- Property taxes, often collected monthly into an escrow account.
- Homeowners insurance, also commonly paid through escrow.
- Private mortgage insurance (PMI), usually required if your down payment is below 20%.
- HOA fees, if the home is in a managed community.
Lenders call the total of principal, interest, taxes and insurance "PITI". When you decide how much house you can afford, compare PITI, not just the principal-and-interest payment.
Three things that change your payment the most
- Interest rate: even half a percentage point changes the payment and the total interest noticeably over 30 years.
- Loan term: a 15-year loan has a higher monthly payment than a 30-year loan but costs far less in total interest.
- Down payment: a larger down payment lowers P, which lowers every payment, and may let you avoid PMI.
Paying a mortgage off faster
Because interest is charged on the remaining balance, any extra money applied to principal reduces future interest. Even a modest extra payment each month can shorten the loan by years. Before you do, check with your lender that there is no prepayment penalty and that extra amounts are applied to principal.
Frequently asked questions
Does my payment change over time?
With a fixed-rate mortgage, principal and interest stay the same. Your total payment can still change if property taxes or insurance premiums change. With an adjustable-rate mortgage (ARM), the interest rate, and therefore the payment, can change after an initial fixed period.
Why is so much of my early payment interest?
Interest is calculated on the outstanding balance, which is highest at the start. As the balance falls, the interest portion shrinks.
Is a lower payment always better?
Not necessarily. A longer term lowers the monthly payment but increases total interest. The right choice depends on your budget, your goals and how long you plan to stay in the home.
Try it yourself
Use our mortgage calculator to enter your own loan amount, rate and term, and see the monthly payment and total interest. Compare different scenarios, such as a lower rate, a shorter term or a bigger down payment, to see which matters most for you.
This guide is for educational purposes only and is not financial, tax, or legal advice.