How a Mortgage Payment Is Calculated (With Charts and Examples)

A mortgage payment looks like one number, but it is built from a short formula and a few extra costs. Once you see how the pieces fit, it is much easier to compare loans, understand why paying extra helps so much, and decide how much house you can really afford. This guide walks through the maths with one real example and shows the results in charts.

The mortgage payment formula

For a standard fixed-rate loan, the monthly payment for principal and interest comes from this formula:

The monthly rate r is the yearly rate divided by 12, and n is the number of years times 12. The formula spreads the loan over n equal payments so that the balance reaches exactly zero at the end, with each month's interest charged on whatever is still owed.

A worked example

Say you buy a $375,000 home with a 20% down payment of $75,000, so you borrow $300,000 on a 30-year fixed loan at 6.5%.

1. Monthly rate: 6.5% ÷ 12 = 0.5417% a month, or r = 0.0054167.
2. Number of payments: 30 × 12 = n = 360.
3. Growth factor: (1 + r)³⁶⁰ = 6.9918.
4. Payment: $300,000 × 0.0054167 × 6.9918 ÷ (6.9918 − 1) = $1,896.20 a month.

Over 360 payments you would pay back $682,633 in total. That is $382,633 of interest on top of the $300,000 you borrowed, which means the interest on this loan is larger than the loan itself.

Why early payments are mostly interest

Interest is charged each month on the balance that remains. At the start the balance is at its highest, so the interest is too. In the very first month the interest is $300,000 × 0.0054167 = $1,625.00, which leaves only $271.20 of your $1,896.20 payment to reduce the loan. As the balance falls, the interest part shrinks and the principal part grows, even though the payment never changes.

View the numbers behind the first chart

Year	Principal paid	Interest paid	Balance at year end
1	$3,353	$19,401	$296,647
5	$4,346	$18,409	$280,833
10	$6,009	$16,745	$254,328
15	$8,310	$14,445	$217,677
20	$11,491	$11,263	$166,996
25	$15,890	$6,864	$96,912
30	$21,973	$781	$0

The turning point comes in month 233, about year 19.4, when the principal part of a payment finally passes the interest part. This is why a loan feels slow to pay down at first.

What else is in your monthly payment

The formula gives only principal and interest, often written P&I. Most lenders also collect other costs each month and pay them for you from an escrow account. Together with principal and interest they are often called PITI:

• Property taxes, set by your local government. They are charged on the value of the home, not on the loan.
• Homeowners insurance, which the lender requires to protect the building.
• Private mortgage insurance (PMI), which is usually required on a conventional loan when the down payment is under 20%. In this example the down payment is 20%, so there is none.
• HOA dues, if the home is in a community with a homeowners association. These are usually paid separately.

In this example the tax and insurance add about $469 a month, so the real bill is $2,365 and not $1,896. When you work out what you can afford, use the full figure.

How the loan term changes the cost

A shorter loan usually has a lower interest rate and, more importantly, far fewer months in which interest can build up. Compare our 30-year loan with a 15-year loan on the same $300,000. The rates here are examples, not current market rates.

The better choice depends on your budget. A higher payment is only a good idea if you can afford it comfortably, since a missed payment costs far more than the interest you save.

The power of extra payments

Any extra money you send goes straight to principal, which lowers the balance on which future interest is charged. Adding just $200 a month to the 30-year loan above would pay it off in about 23.1 years instead of 30, and cut the total interest from $382,633 to about $279,185. That saves roughly $103,449 and removes 6.9 years of payments. Check with your lender that extra payments are applied to principal and that there is no prepayment penalty.

Common mistakes to avoid

• Judging by the monthly payment alone. A longer term gives a lower payment but a much higher total cost.
• Forgetting taxes, insurance and PMI. They can add several hundred dollars to the monthly bill.
• Ignoring closing costs. Fees at closing are paid in addition to the down payment, commonly a few percent of the loan.
• Comparing the rate instead of the APR. The APR includes some fees and gives a fairer comparison between lenders.
• Assuming an adjustable rate will stay low. The payment on an adjustable-rate loan can rise when the rate resets.

Common questions

Sources and further reading

• Consumer Financial Protection Bureau: Buying a house
• CFPB: What is private mortgage insurance?
• CFPB: What is an escrow account?

This guide is for general education and is not financial advice. The rates, taxes and insurance costs in the examples are illustrations, not quotes. Talk to a licensed lender or adviser about your own situation.