How to Calculate a Mortgage Payment (With Example)
A mortgage is usually the biggest loan most people take out, so it is worth understanding exactly how the monthly payment is built. The good news is that the math is a single formula, and once you know it, you can judge any offer.
The mortgage payment formula
For a fixed-rate loan, the monthly principal-and-interest payment is:
M = P Γ r Γ· (1 β (1 + r)βn)
- P is the amount you borrow (price minus down payment).
- r is the monthly interest rate: the yearly rate divided by 12, as a decimal.
- n is the number of monthly payments: years Γ 12.
A worked example
Suppose you buy a home for 400,000 with 20% down. You borrow 320,000 at 6% for 30 years. The monthly rate is 0.06 Γ· 12 = 0.005 and n is 360. Plugging in gives a payment of about 1,918.56 per month. Over 30 years you would repay roughly 690,700, which means about 370,700 is interest, more than the amount borrowed. You can check any figures like this with the mortgage calculator.
What else is in your monthly bill?
Lenders often add property tax and homeowners insurance to your payment through an escrow account. If your down payment is under 20%, you may also pay mortgage insurance. Condo or HOA fees are separate. Always compare offers using the full monthly cost, not only principal and interest.
How the main levers change the cost
- Interest rate: even a one-point difference can change the payment by hundreds per month on a large loan.
- Term: a 15-year loan has a higher payment than a 30-year loan but costs far less interest overall.
- Down payment: every extra dollar you put down is a dollar you do not pay interest on.
- Extra payments: paying a little extra toward principal each month shortens the loan and saves interest.
Why early payments are mostly interest
Interest is charged on the outstanding balance. At the start the balance is highest, so most of each payment goes to interest. Over time the balance falls, the interest part shrinks, and more of each payment goes to principal. This process is called amortization, and the yearly table in our calculator shows it clearly.
Tips before you commit
- Get quotes from several lenders and compare the annual percentage rate, which includes fees.
- Keep a cash cushion after closing for repairs and moving costs.
- Try the numbers at a rate one point higher to check that you can still afford the payment.
For other loans such as cars and personal loans, the same formula applies; use the loan EMI calculator.