How Mortgage Payments Are Calculated
A mortgage payment has four parts — principal, interest, taxes and insurance — and the interesting one is the split between principal and interest, which changes every single month for the life of the loan.
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The Payment Formula
M is the monthly payment, P the loan amount, r the monthly interest rate (annual rate ÷ 12), and n the number of monthly payments (360 for a 30-year loan). This is the standard amortization formula used by every lender.
Example: $300,000 at 6.5% for 30 years. Monthly rate = 0.065 ÷ 12 = 0.0054167. Payment = 300,000 × 0.0054167 ÷ (1 − 1.0054167^−360) ≈ $1,896.20.
Why the Principal/Interest Split Moves
Each payment first covers the interest accrued on the current balance, and the remainder reduces the principal. Early on, the balance is huge, so most of the payment is interest. As the balance falls, the interest shrinks and more of the payment attacks principal — the split flips over the loan's life.
On the example above, the first payment is about $1,625 interest and $271 principal. By year 20, the split is roughly reversed. This is why an amortization schedule is worth looking at — it shows the whole journey.
PITI: The Full Monthly Cost
Lenders talk about PITI — Principal, Interest, Taxes and Insurance. Property tax and homeowners insurance are usually collected monthly into an escrow account and paid annually by the lender. Add HOA fees and PMI (when your down payment is under 20%) and you have the real monthly cost of owning.
How Rates and Terms Interact
A lower rate or a longer term both lower the payment — but for opposite reasons. A longer term spreads the same principal over more payments, which raises total interest substantially. A 30-year loan at 6.5% costs about $382,000 in interest on $300,000; the 15-year version costs roughly $170,000.
Try It Yourself
The mortgage calculator on this site applies exactly this formula and adds taxes, insurance and PMI, with the full amortization breakdown available on the payment and amortization pages.
Article FAQ
What is the formula for a mortgage payment?
M = P × r / (1 − (1 + r)^−n), with r the monthly rate and n the number of payments.
Why is most of my early payment interest?
Interest is charged on the large early balance. As the balance falls, the interest share shrinks and the principal share grows.
Does the calculator include taxes and insurance?
Yes — enter annual tax and insurance amounts and they are added to the monthly payment as escrow.