How to Calculate Mortgage Payments Step by Step

Understanding how your mortgage payment is calculated gives you the power to compare loan options, plan your budget, and avoid surprises at closing. Whether you are buying your first home or refinancing an existing loan, the math behind your monthly payment follows a straightforward formula that balances principal repayment with interest charges over time. This guide walks you through that formula, explains every component of a total housing payment, and demonstrates the calculation with real numbers so you can run it yourself.

The Mortgage Payment Formula

Lenders use a standard amortization formula to determine how much you owe each month. The formula ensures that your loan balance reaches zero by the end of the term while distributing interest charges across every payment. Here is the formula expressed in its mathematical form:

This equation produces a fixed monthly payment amount that stays the same for the entire loan term on a fixed-rate mortgage. Each payment covers a portion of interest on the remaining balance plus a portion that reduces the principal. Early in the loan, most of your payment goes to interest. Over time, the balance shrinks, interest charges decrease, and more of each payment applies to principal.

Breaking Down the Variables

M represents the monthly mortgage payment, the amount you send to your lender each month covering principal and interest only. P is the loan principal, the total amount borrowed after subtracting your down payment from the purchase price. r is the monthly interest rate, calculated by dividing the annual rate by 12. For a 6.5% annual rate, the monthly rate is 0.065 / 12 = 0.005417. n is the total number of monthly payments over the loan term. A 30-year mortgage has 360 payments (30 × 12), while a 15-year mortgage has 180.

Step-by-Step Calculation Example

Suppose you are buying a $400,000 home with a 10% down payment and a 30-year fixed-rate mortgage at 6.5% interest. Here is how to calculate the monthly principal and interest payment:

Step 1 — Determine the loan amount. The home costs $400,000. With a 10% down payment of $40,000, you borrow $360,000. So P = $360,000.

Step 2 — Calculate the monthly interest rate. The annual rate is 6.5%, which equals 0.065 in decimal form. Divide by 12 months: r = 0.065 / 12 = 0.005417.

Step 3 — Determine the total number of payments. A 30-year term means n = 30 × 12 = 360 payments.

Step 4 — Plug values into the formula. Calculate (1 + r)ⁿ first: (1.005417)³⁶⁰ = 6.9913. Then compute the numerator: r × (1 + r)ⁿ = 0.005417 × 6.9913 = 0.037874. Next, calculate the denominator: (1 + r)ⁿ − 1 = 6.9913 − 1 = 5.9913.

Step 5 — Solve for M. M = $360,000 × (0.037874 / 5.9913) = $360,000 × 0.006321 = $2,275.57 per month.

That $2,275.57 covers only principal and interest. Your actual monthly obligation will be higher once you add property taxes, insurance, and potentially PMI.

What Makes Up Your Total Monthly Payment

Lenders and real estate professionals refer to the full payment as PITI, an acronym for Principal, Interest, Taxes, and Insurance. Understanding each component helps you budget accurately and compare offers from different lenders.

Principal and Interest

This is the core payment calculated by the amortization formula. Principal is the portion that reduces your outstanding loan balance, building equity in your home. Interest is the cost charged by the lender for borrowing the money. On a $360,000 loan at 6.5% over 30 years, you will pay approximately $459,205 in total interest over the life of the loan, meaning the total cost of the home after interest is $819,205.

Property Taxes

Local governments assess property taxes based on your home's assessed value. The national average property tax rate is approximately 1.1% of the home's value, though rates vary significantly by state and county. On a $400,000 home, that average translates to about $4,400 per year or roughly $367 per month. Most lenders collect property taxes monthly through an escrow account and pay them on your behalf when they come due.

Homeowners Insurance

Your lender requires homeowners insurance to protect their investment in the property. The average annual premium for homeowners insurance in the United States runs around $1,800 to $2,400 depending on location, coverage level, and home value. For budgeting purposes, estimate about $150 to $200 per month. This amount is also typically collected through your escrow account alongside property taxes.

Private Mortgage Insurance

If your down payment is less than 20% of the purchase price, lenders require Private Mortgage Insurance (PMI) on conventional loans. PMI protects the lender if you default. Rates typically range from 0.3% to 1.5% of the original loan amount per year, depending on your credit score and loan-to-value ratio. On a $360,000 loan, PMI might cost between $90 and $450 per month. The good news is that PMI is automatically removed once your loan-to-value ratio reaches 78%, or you can request removal at 80%.

HOA Dues and Other Costs

If you buy a condo, townhouse, or home in a planned community, you may also pay monthly homeowners association (HOA) dues. These cover shared amenities, landscaping, exterior maintenance, and community services. HOA fees range from $100 to $700 or more per month depending on the community. While not part of your mortgage payment, lenders include HOA dues when calculating your debt-to-income ratio for qualification purposes.

Real-World Payment Scenarios

Numbers become clearer with context. Here are three realistic scenarios that show how different price points, down payments, and locations affect total monthly housing costs.

First-Time Buyer on a Moderate Budget

Lisa is purchasing a $280,000 home in a suburban area with a 5% down payment ($14,000), resulting in a $266,000 loan. Her 30-year fixed rate is 6.75%. Using the mortgage formula, her monthly principal and interest payment is approximately $1,725. Property taxes in her county run about 1.0%, adding $233 per month. Homeowners insurance costs $150 per month. Because she put down less than 20%, PMI adds $133 per month (0.6% of the loan amount annually). Her total PITI payment comes to about $2,241 per month. Lisa also budgets $150 per month for maintenance and repairs.

Growing Family Upsizing

Marcus and Priya are selling their starter home and upgrading to a $475,000 property. They apply $95,000 from their sale proceeds as a 20% down payment, borrowing $380,000 at 6.25% over 30 years. Their principal and interest payment is $2,341. Property taxes at 1.2% equal $475 per month, and insurance costs $185. With 20% down, they avoid PMI entirely. Their total PITI is approximately $3,001 per month. They chose to avoid PMI by reaching the 20% threshold, which saves them roughly $190 per month compared to a 10% down payment scenario on the same home.

High-Cost Market Purchase

David is buying a $750,000 home in a high-cost metropolitan area with a 15% down payment ($112,500), resulting in a $637,500 loan at 6.5% over 30 years. His principal and interest payment is $4,030. Property taxes in his area are 1.3%, adding $813 per month. Insurance runs $225 per month. PMI at 0.5% costs $266 per month. His total monthly obligation is approximately $5,334. David plans to make extra principal payments each month to reach the 80% loan-to-value threshold within four years and eliminate PMI, saving $266 per month going forward.

How Interest Rates Affect Your Payment

Interest rates have a dramatic impact on both your monthly payment and total borrowing cost. The following table illustrates the effect of different rates on a $350,000 loan over a 30-year term, showing only principal and interest:

As the table shows, a 2.5-percentage-point difference between 5.0% and 7.5% results in an extra $568 per month and more than $204,000 in additional interest over the life of the loan. This is why even small rate improvements are worth pursuing. Getting quotes from at least three to five lenders and comparing their Loan Estimates is one of the most effective ways to reduce your total borrowing cost.

30-Year vs 15-Year Mortgage Comparison

Choosing between a 30-year and a 15-year mortgage is one of the biggest decisions borrowers face. A 15-year loan typically offers a lower interest rate (often 0.5% to 0.75% less than a 30-year) but requires significantly higher monthly payments. Here is a comparison using a $350,000 loan:

The 15-year option costs $698 more per month but saves over $272,000 in interest over the life of the loan. If your budget can handle the higher payment while still leaving room for emergency savings and retirement contributions, the 15-year path builds equity much faster and frees you from mortgage debt sooner.

Strategies to Lower Your Monthly Payment

If your calculated payment seems too high, several strategies can bring it down without necessarily compromising your homeownership goals.

Increase your down payment. A larger down payment reduces the loan amount and may eliminate PMI, both of which lower your monthly obligation. Even increasing from 5% to 10% down on a $350,000 home saves about $111 per month in principal and interest alone.

Improve your credit score before applying. Borrowers with scores above 760 typically receive the best rates. Paying down credit card balances, correcting errors on your credit report, and avoiding new credit inquiries in the months before applying can boost your score significantly.

Shop multiple lenders. Rate quotes can vary by 0.25% to 0.5% or more between lenders for the same borrower. The Consumer Financial Protection Bureau recommends getting at least three Loan Estimates to compare rates, fees, and closing costs.

Consider buying mortgage points. Discount points let you pay upfront to reduce your interest rate, typically by 0.25% per point. Each point costs 1% of the loan amount. This strategy makes sense if you plan to keep the loan long enough to recoup the upfront cost through lower monthly payments.

Extend the loan term. Choosing a 30-year term over a 20-year term lowers monthly payments but increases total interest. Use this option if monthly cash flow is your primary concern.

Challenge your property tax assessment. If you believe your home was over-assessed, filing an appeal with your county assessor's office can reduce your annual property tax bill and lower your monthly escrow payment.

Common Mistakes to Avoid

Forgetting about taxes and insurance. Many first-time buyers focus only on the principal and interest figure from the formula and are shocked when the actual payment is 30% to 40% higher. Always calculate the full PITI amount.

Ignoring PMI. If you put less than 20% down, PMI adds a meaningful amount to your monthly payment. Factor it into your budget from the start and track when you can request its removal.

Using the wrong rate in your calculation. Make sure you use the interest rate, not the APR, in the payment formula. APR includes fees and is useful for comparing loan offers, but the interest rate determines your actual monthly payment amount.

Not accounting for rate changes on ARMs. Adjustable-rate mortgages start with a lower teaser rate but can adjust significantly after the initial period. If you are considering an ARM, calculate what your payment would be at the maximum possible rate to ensure you can afford it.

Stretching to the maximum approved amount. Just because a lender approves you for a certain loan size does not mean that payment fits comfortably in your budget. Leave room for savings, maintenance costs, and unexpected expenses.

Last updated: February 23, 2026