How your monthly payment is calculated
A mortgage is an amortising loan: every payment covers the interest that has built up since the last payment, and whatever is left over reduces the balance. Early payments are almost entirely interest; later ones are almost entirely principal.
The monthly payment is fixed and comes from this formula:
M = P × r(1 + r)n / ((1 + r)n − 1)
- M — the monthly payment
- P — the principal, i.e. the amount borrowed
- r — the monthly interest rate (annual rate ÷ 12, as a decimal)
- n — the total number of monthly payments (years × 12)
Because the rate is divided by twelve but compounded monthly, the effective annual cost is slightly higher than the headline rate. That compounding is why a 30-year loan costs far more in total than a 15-year loan, even though the rate is the same.
What this calculator does not include
The result is principal and interest only. A real monthly housing cost usually also includes:
- Property tax — often 1–2% of the home value per year, collected monthly
- Home insurance — typically $1,000–$2,000 per year
- Mortgage insurance (PMI) — usually required when the down payment is under 20%
- HOA fees — if the property belongs to a homeowners association
Lenders call the full figure PITI (principal, interest, taxes, insurance). If you are budgeting, add these on top — they can easily add 30–50% to the payment you see here.
Ways to pay less interest
- Shorten the term. A 15-year loan has a higher payment but dramatically less total interest.
- Make extra principal payments. Even one extra payment a year shortens the loan noticeably.
- Improve your rate. A 0.5% lower rate changes the total cost by tens of thousands on a large loan.
- Increase the down payment. It lowers the principal and can remove PMI entirely.