How to Calculate Mortgage Payments
A mortgage payment consists of principal (the loan amount) and interest (the cost of borrowing). This calculator uses the standard amortization formula to determine your fixed monthly payment.
Mortgage Payment Formula
M = P × [r(1+r)^n] / [(1+r)^n - 1]
- M = Monthly payment
- P = Principal loan amount
- r = Monthly interest rate (annual rate ÷ 12)
- n = Total number of payments (years × 12)
Example Calculation
For a $300,000 loan at 6.5% APR over 30 years:
- Monthly rate: 6.5% ÷ 12 = 0.542%
- Number of payments: 30 × 12 = 360
- Monthly payment: $1,896.20
- Total interest paid: $382,633
Understanding Amortization
With each payment, a portion goes to interest and the rest to principal. Early payments are mostly interest; later payments are mostly principal. The amortization schedule shows this breakdown for every payment.
Tips for Lower Mortgage Costs
- Larger down payment: Reduces principal and may eliminate PMI
- Shorter loan term: Higher payments but much less total interest
- Better credit score: Qualifies you for lower interest rates
- Extra payments: Even small extra payments reduce total interest significantly
15-Year vs 30-Year Mortgage
On a $300,000 loan at 6.5%:
- 30-year: $1,896/month, $382,633 total interest
- 15-year: $2,613/month, $170,389 total interest
The 15-year costs $717 more per month but saves $212,244 in interest. 15-year rates are typically 0.5-0.75% lower than 30-year rates, increasing the savings further.
Impact of Extra Payments
Adding even small amounts to your monthly payment dramatically reduces total interest:
- $100/month extra on a $200K loan at 4%: saves $26,500 in interest, pays off 4.5 years early
- $200/month extra: saves $44,000, pays off 8 years early
- One extra payment per year: cuts a 30-year mortgage to about 25 years
How Much House Can You Afford?
The 28/36 rule is a standard guideline:
- 28% rule: Spend no more than 28% of gross monthly income on housing costs
- 36% rule: Total debt payments (housing + car + student loans + credit cards) should not exceed 36%
Example: $6,000/month gross income → max housing payment of $1,680, max total debt of $2,160.
Private Mortgage Insurance (PMI)
PMI is required when your down payment is less than 20%. It costs 0.5-1.5% of the loan annually ($83-$250/month on a $200K loan). PMI is automatically removed when your balance reaches 78% of the home's original value, or you can request removal at 80%.