How to Calculate Your Mortgage Payment Step by Step
Learn exactly how mortgage payments are calculated including principal, interest, PMI, taxes, and insurance with real examples.
The Mortgage Payment Formula
Your monthly payment uses three inputs: loan amount, interest rate, and loan term. For example, a $320,000 loan at 6.5% for 30 years works out to $2,023 per month for principal and interest.
But this is only part of your total payment. Most borrowers also pay property taxes, homeowners insurance, and possibly PMI collected together in escrow.
What Makes Up Your Total Payment
Your total payment includes four components called PITI: Principal (reduces your loan balance), Interest (cost of borrowing), Taxes (property taxes, typically 1-2% of home value annually), Insurance (homeowners insurance, typically $1,000-$3,000 per year).
On a $400,000 home with 20% down at 6.5%: principal and interest $2,023, property taxes $417, insurance $150, total approximately $2,590 per month. Below 20% down, add PMI of $100-$300 monthly.
15-Year vs 30-Year Mortgage
On a $320,000 loan at 6%: The 30-year costs $1,919 per month with $370,684 total interest. The 15-year costs $2,700 per month with $166,054 total interest.
The 15-year costs $781 more monthly but saves $204,630 in interest. If you can afford higher payments, the 15-year builds equity much faster.
How Extra Payments Save Money
On a $320,000 mortgage at 6.5% for 30 years, adding just $100 monthly in extra principal saves approximately $45,000 in interest and pays off the loan 5 years early. Adding $300 monthly saves over $100,000 and pays off 10 years early.
Extra payments have the most impact early in the loan when the balance is highest and most of your payment goes toward interest.
Tips for the Lowest Rate
Improve your credit score above 740. Save 20% down to avoid PMI. Shop multiple lenders since rates vary by 0.5% or more. Consider paying points to buy down your rate. Lock your rate quickly since rates change daily.
Even a 0.5% difference on a $320,000 loan changes total interest by over $35,000.
Frequently Asked Questions
How much house can I afford?
Use the 28/36 rule: spend no more than 28% of gross income on housing, 36% on total debt. On $75,000 salary, max housing payment is about $1,750 per month.
What credit score do I need?
Conventional loans need 620 minimum, 740+ for best rates. FHA accepts 580 with 3.5% down. VA has no official minimum but most lenders want 620+.
Should I pay points?
One point (1% of loan) typically lowers rate by 0.25%. Worth it if you stay 4-5+ years. Skip points if you might move sooner.