How to Calculate Your Mortgage Payment — Formula and Examples

Updated October 2026 · 5 min read

A mortgage is likely the largest financial commitment most people will ever make. Understanding how your monthly payment is calculated — and how much of it actually reduces your loan balance versus paying interest to the bank — helps you make smarter decisions about loan terms, extra payments, and refinancing.

The Mortgage Payment Formula

Fixed-rate mortgage payments use the standard amortization formula, which produces equal monthly payments across the entire loan term:

Worked Example: $350,000 Loan at 6.75%

30-Year vs. 15-Year: The Real Cost Difference

Same $350,000 loan at 6.25% (15-year rates are typically 0.5-0.75% lower):

Choosing the 15-year loan saves nearly $277,000 in interest at the cost of an extra $732/month. Whether that is the right trade-off depends on your income, other financial goals, and whether you could earn more by investing the difference.

What Is Amortization?

Amortization is the process of paying down the loan through fixed payments. Each payment covers that month's interest first, then the remainder reduces the principal balance. As the balance decreases, less interest accrues each month — so a larger share of each subsequent payment goes to principal.

In the early years of a 30-year mortgage, over 80% of each payment goes to interest. By year 25, the split reverses. This is why making even small extra principal payments early in the loan can save tens of thousands of dollars and knock years off the term.

Beyond Principal and Interest: The Full Monthly Cost

• Property taxes: Collected monthly and paid annually from escrow — typically 1-2% of home value per year
• Homeowners insurance: Required by the lender; typically $100-200/month
• PMI: Private Mortgage Insurance if your down payment was under 20% — usually 0.5-1.5% of the loan amount annually, removable once equity reaches 20%

The total of Principal + Interest + Taxes + Insurance is called PITI — and it is what most lenders use to qualify borrowers. A common rule is to keep PITI under 28% of gross monthly income.