CalculateY
Understanding Your Mortgage Payment
A step-by-step guide to how mortgage payments are calculated, what affects your monthly payment, and how to evaluate different loan scenarios.
What Goes Into a Mortgage Payment
A mortgage payment is more than just paying back the money you borrowed. Most monthly mortgage payments include four components, often called PITI:
- Principal: the portion that reduces your loan balance
- Interest: the cost of borrowing the money
- Taxes: property taxes, often collected by the lender and held in escrow
- Insurance: homeowner’s insurance, also often escrowed
This guide focuses on principal and interest, which are the components determined by the loan terms. Taxes and insurance vary by location and property.
Try it yourself
Estimate your monthly mortgage payment, total interest, and total cost based on loan amount, interest rate, and term.
Open Mortgage CalculatorThe Amortization Formula
The standard formula for a fixed-rate mortgage payment is:
M = P x [r(1 + r)^n] / [(1 + r)^n - 1]
Where:
- M = estimated monthly payment
- P = principal (the loan amount)
- r = monthly interest rate (annual rate divided by 12)
- n = total number of payments (years times 12)
This formula calculates a fixed payment amount that, if paid every month for the full term, will pay off both the principal and all accrued interest by the end of the loan.
How Interest Rates Affect Your Payment
The interest rate has a significant impact on both the monthly payment and the total cost of the loan. Consider a $300,000 loan over 30 years:
- At 5%: estimated monthly payment of $1,610, total interest of approximately $279,767
- At 6%: estimated monthly payment of $1,799, total interest of approximately $347,515
- At 7%: estimated monthly payment of $1,996, total interest of approximately $418,527
A single percentage point increase on a $300,000 loan adds roughly $189 to the monthly payment and approximately $67,000 to total interest paid over 30 years.
15-Year vs. 30-Year Terms
Shorter loan terms mean higher monthly payments but significantly less total interest:
For a $300,000 loan at 6%:
- 30-year term: estimated monthly payment of $1,799, total interest of approximately $347,515
- 15-year term: estimated monthly payment of $2,532, total interest of approximately $155,683
The 15-year option costs $733 more per month but saves approximately $191,832 in interest over the life of the loan. Whether this tradeoff makes sense depends on your monthly budget and other financial priorities.
Understanding Amortization
In the early years of a mortgage, most of each payment goes toward interest rather than principal. This shifts over time:
- Year 1 of a 30-year, $300,000 loan at 6%: roughly $17,940 goes to interest and only $3,649 to principal
- Year 15: the split is roughly even
- Year 30: almost all of the payment goes to principal
This is why extra payments early in the loan have the biggest impact. An extra $100/month in the first year has a much greater effect than the same extra payment in year 25.
Try it yourself
Estimate how your investments may grow over time with compound interest and regular contributions.
Open Compound Interest CalculatorWhat This Calculator Does Not Include
The mortgage calculator provides estimates for the principal and interest components of a payment. It does not account for:
- Property taxes (vary by location, typically 0.5% to 2.5% of home value annually)
- Homeowner’s insurance
- Private mortgage insurance (PMI), typically required for down payments below 20%
- HOA fees
- Closing costs
- Potential rate changes (for adjustable-rate mortgages)
For a complete picture of housing costs, consult a mortgage professional who can account for all these factors based on your specific situation.
Key Takeaways
- The interest rate and loan term are the two biggest factors in your monthly payment
- Small rate differences compound into large cost differences over 15 to 30 years
- Early in the loan, most of your payment goes to interest, not principal
- Extra payments early in the loan have the greatest impact on total interest
- The calculator provides estimates based on the standard amortization formula; actual costs will include taxes, insurance, and other fees