How to Calculate Mortgage Payments: A Step-by-Step Guide

Step 1: Understand the four parts of a mortgage payment

A typical monthly mortgage payment is made up of four pieces, often abbreviated PITI: principal, interest, taxes, and insurance.

Principal is the amount that actually reduces what you owe. Interest is the cost of borrowing, calculated on the remaining balance. Taxes and insurance are usually collected into an escrow account each month and paid by your lender when they come due.

Step 2: Know the numbers you need

To calculate your payment you need the loan amount (home price minus your down payment), the annual interest rate, the loan term in years, and your annual property tax and homeowners insurance amounts.

For example: a $300,000 loan at 6.5% APR for 30 years, with $3,600 a year in taxes and $1,200 a year in insurance.

Step 3: Calculate the monthly interest rate

Convert the annual rate to a monthly rate by dividing by 12. For 6.5%, the monthly rate is 6.5 ÷ 100 ÷ 12 = 0.005417.

Next, count the total number of payments. A 30-year loan has 30 × 12 = 360 monthly payments.

Step 4: Apply the payment formula

Use M = P × r × (1 + r)^n / ((1 + r)^n − 1), where P is the principal, r is the monthly rate, and n is the number of payments.

For our example this works out to $1,896.20 per month for principal and interest. Adding the escrow — ($3,600 + $1,200) ÷ 12 = $400 — gives a total monthly payment of $2,296.20.

Step 5: Check how much of your payment is interest

Your first payment is almost entirely interest. On this loan, the first month charges $1,625.00 in interest and only $271.20 in principal. Over 30 years you pay about $382,633 in total interest — more than the original loan.

That is why a higher down payment, a lower rate, or a shorter term can save so much money. Run different scenarios in the calculator to see the difference.

Frequently asked questions