How to Calculate Your Monthly Mortgage Payment (Step-by-Step Guide)

Buying a home is likely the single largest financial commitment you'll ever make. Understanding exactly how your mortgage payment is calculated — and what levers you can pull to lower it — can save you tens or even hundreds of thousands of dollars over the life of your loan.

What Makes Up a Mortgage Payment?

Your total monthly mortgage payment is often referred to as PITI — Principal, Interest, Taxes, and Insurance. Principal is the portion that reduces your loan balance. Interest is the cost of borrowing money. Property taxes and homeowner's insurance are typically collected monthly by your lender and held in an escrow account.

The Mortgage Payment Formula

The monthly principal and interest (P&I) payment is calculated using the standard amortization formula: M = P × [r(1+r)^n] / [(1+r)^n - 1]. In this formula, P is your loan amount (home price minus down payment), r is your monthly interest rate (annual rate divided by 12), and n is the total number of monthly payments (loan term in years times 12).

For example, on a $280,000 loan (a $350,000 home with 20% down) at 6.5% interest over 30 years: your monthly rate is 0.005417, total payments are 360, and your monthly P&I payment works out to approximately $1,770. Add property taxes ($292/month) and insurance ($117/month), and your total PITI payment is about $2,179/month.

How Down Payment Affects Your Mortgage

Your down payment directly impacts three things: your loan amount (and therefore your monthly payment), whether you need Private Mortgage Insurance (PMI), and your interest rate. A 20% down payment is the traditional standard that avoids PMI. On a $350,000 home, that's $70,000 down with a $280,000 loan, versus only $17,500 down (5%) with a $332,500 loan.

15-Year vs. 30-Year Mortgage: The Real Math

The choice between a 15-year and 30-year mortgage is one of the most impactful decisions you'll make. On a $280,000 loan, a 30-year mortgage at 6.5% costs $1,770/month with $357,335 in total interest. A 15-year mortgage at 5.75% (shorter terms usually get lower rates) costs $2,326/month — that's $556 more per month — but you pay only $138,659 in total interest. That's a savings of $218,676.

Understanding Amortization

Amortization is how your loan balance decreases over time. In the early years of a mortgage, the majority of each payment goes toward interest. For a $280,000 loan at 6.5%, your first month's payment of $1,770 includes $1,517 in interest and only $253 in principal. By year 15, the split shifts to about $957 in interest and $813 in principal. Only in the final years does most of your payment go toward principal.

This is why making extra principal payments early in your mortgage is so powerful — each extra dollar reduces the balance that future interest is calculated on, creating a compounding savings effect.

How Interest Rates Impact Total Cost

Even a small difference in interest rate has a massive impact over 30 years. On a $280,000 loan over 30 years: at 6.0%, you'd pay $324,427 in total interest. At 6.5%, that jumps to $357,335. At 7.0%, it's $390,883. The difference between 6.0% and 7.0% is $66,456 — just from a single percentage point.

Strategies to Lower Your Mortgage Cost

• •**Improve your credit score** — A score of 740+ qualifies you for the best rates, potentially saving 0.5-1% on your rate
• •**Make a larger down payment** — 20% or more avoids PMI and reduces your loan amount
• •**Shop multiple lenders** — Rates vary significantly between lenders; get at least 3-5 quotes
• •**Consider a 15-year term** — Higher monthly payments but dramatically less total interest
• •**Buy discount points** — Pay upfront to lower your rate if you plan to stay long-term
• •**Make extra principal payments** — Even $100/month extra on a $280,000 30-year mortgage saves $62,000 in interest and pays off the loan 5 years early
• •**Avoid PMI** — If you can't put 20% down, consider a piggyback loan or lender-paid mortgage insurance

Hidden Costs Beyond the Mortgage

Your mortgage payment isn't the full picture of homeownership costs. Budget for property taxes (0.5-2.5% of home value annually), homeowner's insurance ($1,000-$3,000/year), maintenance (1-3% of home value per year), HOA fees if applicable, and utilities. A good rule of thumb: your true monthly cost of owning a home is 30-50% higher than just the mortgage payment.

Key Takeaways

• •Your monthly payment includes principal, interest, property taxes, and insurance (PITI)
• •A larger down payment reduces your payment, avoids PMI, and saves tens of thousands in interest
• •Interest rate differences of even 0.5% translate to tens of thousands over 30 years
• •Early mortgage payments are mostly interest — extra principal payments save the most when made early
• •Use our free mortgage calculator to compare different scenarios and find the best option for your budget