How Mortgage Calculations Work

A mortgage payment looks like one number on your statement, but it's really four things bundled together. Understanding each part helps you shop for homes and loans with confidence.

The Big Formula

Most mortgages are repaid with a fixed payment each month that covers both interest and a growing slice of principal. The monthly payment uses the amortization formula:

Where M is the monthly payment, P is the loan amount (home price minus down payment), r is the monthly interest rate (annual rate ÷ 12) and n is the total number of payments (360 for a 30-year loan).

Why Early Payments Are Mostly Interest

Interest is charged on the remaining balance. Early on the balance is large, so most of your payment is interest. As the balance shrinks, more of each payment goes to principal. That's why after 15 years of a 30-year mortgage you've paid off far less than half.

The PITI Breakdown

Your full payment often includes more than principal and interest:

• Principal — the money that reduces what you owe.
• Interest — the lender's fee for lending you money.
• Taxes — property tax, often held in escrow by the lender.
• Insurance — homeowners insurance and sometimes PMI.

Lenders look at your debt-to-income ratio to make sure PITI plus your other debts stays reasonable — usually below 43% of gross income.

What Actually Moves Your Payment

Three levers control your payment:

• Loan amount — a bigger down payment means a smaller loan and lower payment.
• Interest rate — a 1% rate change can swing your payment by hundreds per month.
• Term — a 15-year loan has higher payments but far less total interest.

Try It Yourself

Use our Mortgage Calculator to see how changes to price, down payment or rate affect your monthly payment — the formula above is running live on that page.