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 roughly 0.5% 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.

Comparing loan terms on the same $320,000

The term is the lever with the biggest effect on lifetime cost, so it deserves its own side-by-side. Keep the $320,000 loan at 6.5 percent and change only the length. A 30-year term costs $2,022.62 a month and about $408,142 in total interest. A 20-year term costs $2,385.83 a month and about $252,600 in interest. Shortening the loan by ten years raises the payment by $363.21 and saves roughly $155,542 of interest.

Shorter loans are often priced at a lower rate than 30-year loans, though the gap varies by lender and market. If a 15-year loan were offered at 5.75 percent, the payment would be $2,657.31, about $634.69 more than the 30-year payment, and total interest would fall to roughly $158,316, saving about $249,826.

The cheaper monthly payment of a long loan is not automatically the better deal. A common compromise is to take the 30-year term for its flexibility and then pay extra toward principal when the budget allows, which leaves you free to drop back to the required payment in a tight month.

How a small rate change moves the payment

Rates feel abstract until you price them. On the same $320,000 and 30-year term, 5.5 percent gives $1,816.92 a month, 6.5 percent gives $2,022.62, and 7.5 percent gives $2,237.49. Each full percentage point shifts the payment by roughly $206 to $215, and a quarter point, from 6.5 to 6.25 percent, saves $52.32 a month ($1,970.30 instead of $2,022.62).

That quarter-point saving is the number to use when a lender offers discount points. One point is a fee equal to 1 percent of the loan, which is $3,200 here. If a point bought a quarter-point rate cut, the break-even is $3,200 divided by $52.32, or about 61 months. Stay in the loan longer than that and the points pay for themselves; sell or refinance sooner and they do not.

The same break-even logic applies to a refinance, where you divide total closing costs by the monthly savings. How much a point lowers the rate differs by lender and day, so ask for quotes with and without points and run each through the calculator.

What extra principal payments really save

Because the first years of a loan are mostly interest, extra principal early is powerful. On the $320,000, 6.5 percent, 30-year loan, adding $100 a month finishes the loan in about 26 years 2 months and trims interest from $408,142 to roughly $346,444, a saving near $61,700. Adding $200 a month pays it off in about 23 years 5 months with interest near $302,714, saving roughly $105,400. At $300 extra the payoff arrives in about 21 years 2 months.

A cheaper route for many people is one extra payment a year. Adding one-twelfth of the payment, about $168.55, to each month ends the loan in roughly 24 years 2 months and saves around $93,000 of interest.

Before you start, confirm two things with your servicer. First, that extra money is applied to principal and not held as a prepayment toward the next due date. Second, whether your loan has a prepayment penalty, which is uncommon on conventional loans but worth a quick check in the note. The usual comparison is whether the guaranteed return of avoided interest beats what the same money could safely earn elsewhere.

Down payment, loan-to-value, and PMI

Lenders measure risk with loan-to-value (LTV): the loan divided by the home's value. On a $400,000 home, putting $80,000 down gives a $320,000 loan and an 80 percent LTV, with no mortgage insurance on a conventional loan. Putting down $20,000 gives a $380,000 loan at 95 percent LTV. At 6.5 percent over 30 years the principal and interest payment becomes $2,401.86 instead of $2,022.62, which is $379.24 more per month for $60,000 less cash at closing.

On top of that comes private mortgage insurance. PMI is quoted as an annual percentage of the loan and varies with credit score and LTV. As an illustration only, 0.5 percent of $380,000 is $1,900 a year, or about $158 a month, and your own quote could be lower or higher.

On conventional loans, federal law lets you request PMI cancellation once the balance reaches 80 percent of the original value, and it terminates automatically at 78 percent if you are current. With a 6.5 percent rate, the $380,000 loan reaches $320,000 after about 10 years 4 months of scheduled payments. Government-backed loans such as FHA use different insurance rules, so read the terms for your specific program.

Will a lender approve this payment?

Affordability is judged by comparing your housing payment, and then all your debts, to gross monthly income. Two ratios are widely cited. The front-end ratio is the housing payment divided by income, with 28 percent a common benchmark. The back-end ratio adds every other monthly debt, such as car loans, student loans and card minimums, with 36 percent a common benchmark. Real limits vary by loan program, lender and credit profile, and some programs approve higher ratios.

Run the $400,000 home through both. The full PITI payment of $2,539.28 divided by 0.28 requires about $9,069 of gross income a month, or roughly $108,800 a year. Now add $600 a month of other debt: ($2,539.28 + $600) divided by 0.36 requires about $8,720 a month, or roughly $104,600 a year. The front-end test is the tighter one in this case.

Passing a ratio does not mean the payment is comfortable. Those ratios use gross income, so they ignore income tax, retirement contributions and childcare. A useful personal test is whether you could still save every month after the full payment, with maintenance, which is often budgeted around 1 percent of the home's value a year, set aside.