How to calculate your monthly mortgage payment

The three numbers that set your payment

A fixed-rate mortgage payment is built from just three inputs: the principal (the amount you actually borrow, which is the price minus your down payment), the interest rate, and the term (how many years you have to repay it). Change any one of them and the monthly payment moves.

The payment is calculated so that if you make it every month for the full term, the loan lands exactly at zero on the final payment. That is what amortization means. Early on, most of each payment is interest; later, most of it is principal, but the dollar amount stays the same the whole way through.

• Principal (P): the loan balance, e.g. a $400,000 home with $80,000 down is a $320,000 loan
• Rate: the annual interest rate, which you convert to a monthly rate
• Term: the number of years, almost always 30 or 15, converted to a number of monthly payments

Turn the rate and term into r and n

The formula does not use the annual rate or the number of years directly. Interest is charged monthly, so you divide the annual rate by 12 to get the monthly rate, written as a decimal. A 6.5% rate becomes 0.065 / 12 = 0.00541667 per month.

The term has to be in months too. Multiply the number of years by 12. A 30-year loan is 30 x 12 = 360 payments; a 15-year loan is 180. These two conversions are where most by-hand mistakes happen, so it is worth doing them first and writing them down before touching the main formula.

• Monthly rate r = annual rate / 12
• Number of payments n = years x 12
• 6.5% over 30 years gives r = 0.00541667 and n = 360

The amortization formula

With r and n in hand, the monthly principal-and-interest payment comes straight from the standard mortgage formula. It looks dense, but it is just the loan amount multiplied by a factor built from the rate and the term.

The (1+r)^n term appears twice, so compute it once and reuse it. Notice that principal scales the whole thing linearly: double the loan and you double the payment, as long as the rate and term stay the same.

Worked example: $320,000 at 6.5% over 30 years

Take a $320,000 loan at a 6.5% annual rate on a 30-year term. First the conversions: r = 0.065 / 12 = 0.00541667, and n = 30 x 12 = 360.

Next compute (1+r)^n = (1.00541667)^360, which is about 6.99180. Plug everything in: the numerator is 320,000 x 0.00541667 x 6.99180 = about 12,119, and the denominator is 6.99180 - 1 = 5.99180. Divide and you get 12,119 / 5.99180, which is about $2,022.62, or roughly $2,023 a month.

That $2,023 is principal and interest only. Over the full 360 payments you pay about $728,142 in total, meaning roughly $408,142 of that is interest, more than the amount you borrowed. Stretching the same loan over 30 years instead of 15 lowers the monthly payment but raises the lifetime interest sharply, which is the trade-off the term controls.

From P&I to PITI: taxes, insurance, and PMI

The formula gives principal and interest, but that is rarely the whole check you write. Most lenders bundle property taxes and homeowners insurance into the monthly payment and hold them in an escrow account, paying those bills for you when they come due. The industry shorthand for the full payment is PITI: Principal, Interest, Taxes, and Insurance.

Using the same $400,000 home from above: if the property tax rate is about 1.1% a year, that is $4,400, or about $367 a month. A homeowners policy at $1,800 a year adds $150 a month. Stacked on top of the $2,023 in principal and interest, the real monthly payment is about $2,540, not $2,023.

One more piece can appear: if your down payment is under 20%, lenders usually require private mortgage insurance (PMI), often 0.3% to 1.5% of the loan per year, until you build enough equity. HOA dues, where they apply, are billed separately and are not part of PITI. When you are budgeting affordability, size the PITI number, not the bare principal-and-interest figure.

• P and I: the amortized payment from the formula, about $2,023 here
• T: property taxes, roughly $367 a month at a 1.1% rate on a $400,000 home
• I: homeowners insurance, about $150 a month at $1,800 a year
• PMI: extra monthly cost if your down payment is below 20%, dropped once you reach enough equity

Why early payments are almost all interest

In the first month of the example, interest is r x balance = 0.00541667 x 320,000 = about $1,733. Out of the $2,023 payment, only about $289 actually reduces the balance. That is why the principal barely moves in the first couple of years.

As the balance shrinks, the interest slice on each payment shrinks with it, so more of the fixed payment goes to principal and the loan accelerates toward the end. This front-loading is also why making even one extra principal payment early, or rounding the payment up, saves a surprising amount of total interest: every extra dollar in the first years removes interest it would have collected for decades.

Common mistakes

A few errors show up again and again when people estimate a mortgage payment by hand or shop by monthly cost. These are planning estimates, not financial advice.

• Forgetting to divide the rate by 12. Plugging the annual rate straight into the formula produces a wildly wrong number; the rate must be monthly.
• Budgeting on principal and interest alone. The $2,023 figure ignores taxes and insurance; the real PITI payment here is closer to $2,540, and lenders qualify you on the full amount.
• Assuming the payment covers everything. HOA dues, PMI, and later tax or insurance increases can all raise the monthly total after closing, especially through escrow adjustments.
• Comparing only the monthly payment across terms. A 30-year loan looks cheaper each month than a 15-year, but costs far more in total interest; compare lifetime cost too.
• Ignoring the down payment. Under 20% down usually triggers PMI and a larger loan, so both the payment and the total interest climb.