How is a monthly mortgage payment calculated?
Last updated March 26, 2026
Your monthly payment is calculated using the formula M = P × [r(1+r)^n] / [(1+r)^n - 1], where P is the loan amount, r is the monthly interest rate, and n is the number of payments. On a $350,000 loan at 6.5% for 30 years, your monthly payment is $2,212.
How to Calculate
- 1
Determine your loan amount (home price minus down payment)
- 2
Convert the annual interest rate to monthly (divide by 12, then by 100)
- 3
Determine total number of payments (years × 12)
- 4
Apply the formula: M = P × [r(1+r)^n] / [(1+r)^n - 1]
- 5
Add property tax, insurance, and PMI for total monthly cost (PITI)
The Formula
M = P × [r(1+r)^n] / [(1+r)^n - 1]This is the standard amortization formula used by every lender. It calculates the fixed monthly payment needed to fully repay the loan over the specified term, with each payment covering both principal and interest.
| Variable | Meaning |
|---|---|
| M | Monthly payment (principal and interest only) |
| P | Principal — the total loan amount |
| r | Monthly interest rate — annual rate divided by 12, then divided by 100 (e.g., 6.5% → 0.005417) |
| n | Total number of monthly payments — loan term in years × 12 (e.g., 30 years → 360) |
Common Examples
$300,000 at 6.5% for 30 years
$1,896/month
$350,000 at 6.5% for 30 years
$2,212/month
$400,000 at 6.5% for 30 years
$2,528/month
$350,000 at 7.0% for 30 years
$2,329/month
$350,000 at 6.0% for 30 years
$2,098/month
$350,000 at 6.5% for 15 years
$3,049/month
$250,000 at 6.5% for 30 years
$1,580/month
What Makes Up a Mortgage Payment (PITI)
When people talk about their "mortgage payment," they usually mean the total monthly amount they send to their lender. That amount is made up of four components, often abbreviated as PITI:
- Principal — the portion that reduces your loan balance. Early in the loan, this is a small fraction of your payment; it grows over time as interest shrinks.
- Interest — the cost of borrowing the money. On a $350,000 loan at 6.5%, your first month's interest alone is roughly $1,896 (calculated as $350,000 × 0.065 ÷ 12). Only about $316 of your first $2,212 payment goes toward principal.
- Taxes — property taxes collected monthly and held in escrow. The national median is about 1.1% of home value per year, so a $440,000 home costs roughly $403 per month in property tax.
- Insurance — homeowner's insurance protects against fire, storms, and liability. The average annual premium in 2026 is approximately $1,900, or about $158 per month.
The mortgage formula M = P × [r(1+r)n] / [(1+r)n - 1] calculates only the principal and interest portion. Taxes and insurance are added on top.
How Amortization Works
A mortgage is an amortizing loan, meaning each fixed monthly payment is split between interest and principal — but the ratio changes over time. In the early years, most of your payment goes toward interest. As the balance shrinks, more of each payment chips away at the principal.
On a $350,000 loan at 6.5% for 30 years ($2,212/month), your first payment breaks down as approximately $1,896 in interest and $316 in principal. By month 180 (halfway through), the split is roughly $1,196 interest and $1,016 principal. In your final year, nearly the entire payment goes to principal. Over the full 30 years, you pay about $446,320 in total interest — more than the original loan amount.
15-Year vs. 30-Year Mortgage: Total Interest Comparison
Choosing a shorter loan term means higher monthly payments but dramatically less interest paid over the life of the loan. Here's the comparison for a $350,000 loan at 6.5%:
- 30-year term: Monthly payment of $2,212. Total interest paid: ~$446,320.
- 15-year term: Monthly payment of $3,049. Total interest paid: ~$198,820.
The 15-year mortgage costs $837 more per month but saves roughly $247,500 in interest over the life of the loan. That's the price of convenience — the 30-year term gives you lower required payments and more cash-flow flexibility, but it costs significantly more in the long run.
How Much House Can You Afford?
Lenders and financial advisors commonly use the 28/36 rule as a guideline for affordability:
- 28% rule: Your total housing costs (PITI) should not exceed 28% of your gross monthly income.
- 36% rule: Your total debt payments (housing plus car loans, student loans, credit cards) should not exceed 36% of your gross monthly income.
For example, if your household gross income is $100,000 per year ($8,333/month), your maximum housing payment should be about $2,333/month. At 6.5% for 30 years, that supports a loan of roughly $368,000 — or a ~$460,000 home with 20% down.
Impact of Credit Score on Interest Rate
Your credit score is one of the biggest factors determining your mortgage interest rate. Even a small rate difference has a large impact over 30 years:
- Excellent (760+): Typically qualifies for the best advertised rates (e.g., 6.25%).
- Good (700–759): May add 0.25–0.5% to the rate.
- Fair (660–699): May add 0.5–1.0% to the rate.
- Poor (620–659): May add 1.0–1.5%, if you qualify at all.
On a $350,000 loan, the difference between 6.0% and 7.0% is $231 per month ($2,098 vs. $2,329) and about $83,160 in total interest over 30 years. Improving your credit score before applying can save tens of thousands of dollars.
When to Consider Refinancing
Refinancing replaces your current mortgage with a new one, ideally at a lower interest rate. The general rule of thumb is that refinancing makes sense when you can lower your rate by at least 0.75 to 1 percentage point, plan to stay in the home long enough to recoup closing costs (typically 2–5% of the loan amount), and the monthly savings justify the effort.
To estimate your break-even point, divide your closing costs by your monthly savings. If refinancing costs $8,000 and saves you $200/month, you break even in 40 months. If you plan to stay longer than that, refinancing is likely worthwhile.
PMI: What It Is and When It Goes Away
Private Mortgage Insurance (PMI) is required by most lenders when your down payment is less than 20% of the home price. PMI protects the lender (not you) in case you default. It typically costs 0.5% to 1.5% of the loan amount per year, added to your monthly payment.
On a $350,000 loan, PMI at 0.8% adds about $233 per month. PMI is automatically removed once your loan balance reaches 78% of the original home value, or you can request removal at 80%. This is one reason many buyers aim for a 20% down payment — it eliminates PMI from day one, reducing the monthly cost by hundreds of dollars.