How to Calculate Your Mortgage Payment

Updated March 2026 · 7 min read

Understanding how your monthly mortgage payment is calculated puts you in control when shopping for a home. Whether you are comparing loan offers, deciding between a 15-year and 30-year term, or simply budgeting, the formula is straightforward once you break it into pieces.

The Mortgage Payment Formula

Lenders use a standard annuity formula to compute the fixed monthly payment on a fully amortizing loan:

Where:

• M = monthly payment (principal + interest only)
• P = loan principal (home price minus down payment)
• r = monthly interest rate (annual rate ÷ 12)
• n = total number of monthly payments (years × 12)

This formula returns the principal and interest portion of your payment. Your actual monthly obligation usually also includes property tax and homeowners insurance, collectively known as PITI.

Worked Example: $300,000 Home at 6.5% for 30 Years

Suppose you are buying a $300,000 home with a 20% down payment. Here is how you would calculate your monthly payment by hand.

Step 1: Determine the Loan Amount

Down payment = 20% of $300,000 = $60,000
Loan principal (P) = $300,000 − $60,000 = $240,000

Step 2: Convert the Annual Rate to a Monthly Rate

Annual rate = 6.5% = 0.065
Monthly rate (r) = 0.065 ÷ 12 = 0.005417

Step 3: Calculate Total Number of Payments

Loan term = 30 years
Total payments (n) = 30 × 12 = 360

Step 4: Plug Into the Formula

Step 5: Add Taxes and Insurance (PITI)

A realistic total monthly payment adds:

If your down payment is less than 20%, you would also pay private mortgage insurance (PMI), typically 0.5%–1% of the loan amount per year, adding roughly $100–$200 to the monthly bill.

What Is PITI?

PITI stands for Principal, Interest, Taxes, and Insurance. Lenders evaluate your ability to afford all four components—not just P&I—when they approve your loan. Here is what each piece means:

• Principal — the portion that reduces your loan balance each month.
• Interest — the lender's fee for letting you borrow money. Early in the loan, most of your payment goes toward interest.
• Taxes — property taxes assessed by your local government, typically collected monthly into an escrow account.
• Insurance — homeowners insurance protects the lender (and you) against damage or loss. Flood insurance may be required in certain zones.

Use the house affordability calculator to see how much home you can afford based on your income and debts.

How Amortization Works

A fixed-rate mortgage uses amortization: your payment stays the same every month, but the split between principal and interest shifts over time.

• In month 1 of our example, $1,300 goes to interest and only $217 goes to principal.
• By month 180 (halfway), about $766 goes to interest and $751 to principal.
• In the final months, nearly the entire payment reduces the balance.

Over 30 years on a $240,000 loan at 6.5%, you would pay approximately $306,108 in total interest—more than the original loan amount. This is why many borrowers consider a 15-year term or making extra payments to save on interest. You can see the full year-by-year breakdown with our amortization calculator.

How Interest Rate Affects Your Payment

Even a small change in interest rate has a large impact over 30 years. Here is how different rates affect the monthly P&I payment on a $240,000 loan:

A 1-percentage-point increase from 6.5% to 7.5% adds $161 per month and nearly $58,000 in total interest. This is why improving your credit score and shopping multiple lenders before locking a rate can save you tens of thousands of dollars.

15-Year vs. 30-Year Mortgage

On the same $240,000 loan at 6.5%:

• 30-year: $1,517/month, $306,108 total interest
• 15-year: $2,091/month, $136,334 total interest

The 15-year payment is $574 higher each month, but you save roughly $170,000 in interest and own the home outright in half the time. 15-year rates are typically 0.5%–0.75% lower than 30-year rates, making the savings even greater.

When Should You Refinance?

Refinancing replaces your existing mortgage with a new one, ideally at a lower rate. A common rule of thumb: refinancing makes sense when you can lower your rate by at least 0.75–1 percentage point and plan to stay in the home long enough to recoup closing costs (typically 2–5 years).

Use the refinance calculator to compare your current loan with a potential new one and see your break-even timeline.

Tips to Lower Your Monthly Payment

1. Increase your down payment. Putting 20% or more down eliminates PMI and reduces your loan balance.
2. Improve your credit score. Scores above 740 typically qualify for the best rates.
3. Choose a longer term. A 30-year loan has a lower monthly payment than a 15-year, though you pay more interest overall.
4. Shop multiple lenders. Rate quotes can vary by 0.5% or more between lenders on the same day.
5. Buy down the rate. Paying discount points upfront (1 point = 1% of the loan) reduces your rate by roughly 0.25%.
6. Appeal your property tax assessment. Lower assessed value means lower monthly escrow.

Key Takeaways

• The mortgage formula M = P × [r(1+r)ⁿ] / [(1+r)ⁿ−1] gives you the principal-and-interest payment.
• Your true monthly cost includes taxes and insurance (PITI), and possibly PMI.
• On a $240,000 loan at 6.5% for 30 years, the monthly P&I is about $1,517 and total interest exceeds $306,000.
• Even small rate differences compound to tens of thousands of dollars over the life of the loan.

Related tools: Mortgage Calculator · Amortization Calculator · House Affordability Calculator · Refinance Calculator