How Mortgage Payments Are Calculated
A mortgage payment consists of principal (the amount you borrowed) and interest (the cost of borrowing). Most mortgages use an amortization schedule — a fixed monthly payment where the proportion of principal vs. interest changes over time. Early payments are mostly interest; later payments are mostly principal.
The standard formula for monthly mortgage payment (M) is:
M = P × [r(1+r)ⁿ] / [(1+r)ⁿ - 1]
Where: P = loan principal, r = monthly interest rate (annual rate ÷ 12), n = total number of payments (loan term in years × 12).
Key Mortgage Terms Explained
Principal: The original loan amount — the home purchase price minus your down payment. A larger down payment means a smaller principal and lower monthly payments.
Interest Rate vs APR: The interest rate is what you pay on the loan principal. The APR (Annual Percentage Rate) includes the interest rate plus fees (origination fees, points, mortgage insurance), giving a more complete cost picture. Always compare APR when shopping lenders.
Loan Term: Most mortgages are 30-year or 15-year fixed. A 15-year loan has higher monthly payments but significantly less total interest paid. A 30-year loan has lower monthly payments but costs more in total interest over the life of the loan.
Down Payment: Conventional loans typically require 20% down to avoid Private Mortgage Insurance (PMI). FHA loans allow 3.5% down with good credit. A larger down payment reduces monthly payments and eliminates PMI.
PMI (Private Mortgage Insurance): Required when your down payment is less than 20%. PMI typically costs 0.5%–1.5% of the loan amount annually, added to your monthly payment. It can be removed once you reach 20% equity.
30-Year vs 15-Year Mortgage
On a $300,000 loan at 7% interest:
30-year fixed: Monthly payment ~$1,996 | Total interest paid ~$418,527 | Total cost ~$718,527
15-year fixed: Monthly payment ~$2,696 | Total interest paid ~$185,235 | Total cost ~$485,235
The 15-year option saves over $233,000 in interest but requires a $700/month higher payment. Use our calculator to find the breakeven point for your budget.
Tips for Getting a Better Mortgage Rate
- Credit score matters most: A score above 760 typically gets the best rates. Every 20-point improvement can save 0.1–0.2% on your rate
- Compare at least 3 lenders: Rates vary significantly between banks, credit unions, and online lenders. Shopping multiple lenders within a 14-day window counts as a single credit inquiry
- Consider points: Paying discount points (1% of loan = 0.25% rate reduction) makes sense if you plan to stay in the home long-term
- Lock your rate: Once you find a good rate, lock it — rates can change daily and rise significantly during the 30–60 day closing process
- Debt-to-income ratio: Lenders prefer your total debt payments (including mortgage) to be below 43% of gross income
Frequently Asked Questions
What's not included in this mortgage calculator?
This calculator estimates principal and interest only. Your actual monthly payment will also include property taxes (typically 1–2% of home value annually), homeowners insurance (~$1,000–$2,000/year), and potentially HOA fees and PMI. Add these to get your true all-in monthly cost.
How much house can I afford?
A common rule: spend no more than 28% of gross monthly income on housing costs (mortgage + taxes + insurance), and total debt payments should stay below 36–43%. For a $100,000 annual salary (~$8,333/month), that's about $2,333/month on housing. Use our House Affordability Calculator for a more detailed estimate.
Is it better to make extra principal payments?
Extra principal payments can significantly reduce total interest and loan term. On a 30-year $300,000 loan at 7%, adding just $200/month in extra principal saves ~$60,000 in interest and shortens the loan by ~5 years. Even occasional lump-sum payments (tax refunds, bonuses) compound over time.