How Mortgage Payments Are Calculated, Step by Step
The mortgage payment formula with a $320,000 example: amortization, why early payments are mostly interest, 15 vs 30 years and extra payments.
Your mortgage payment looks like one number, but it is built from a formula, a schedule and a few add-ons. Once you see how the pieces fit, it is easy to understand why the first years feel like you are paying only interest, and how small changes in rate, term or extra payments can save tens of thousands of dollars.
The formula
For a fixed-rate loan, the principal and interest payment is:
M = P × r × (1 + r)^n ÷ ((1 + r)^n − 1)- M: monthly principal and interest payment
- P: loan amount (price minus down payment)
- r: monthly interest rate = annual rate ÷ 12
- n: number of payments = years × 12
Worked example: $320,000 at 6.5% for 30 years
A $400,000 home with 20% down leaves a $320,000 loan.
- r = 0.065 ÷ 12 = 0.0054167
- n = 30 × 12 = 360
- M = $2,022.62 per month
Over 30 years you pay $728,142 in principal and interest, of which $408,142 is interest, more than the loan itself.
Why early payments are mostly interest
Each month, interest is charged on the remaining balance. In month one, the balance is the full $320,000:
- Interest: 320,000 × 0.0054167 = $1,733.33
- Principal: 2,022.62 − 1,733.33 = $289.29
In the first year you pay about $20,695 in interest and only $3,577 in principal. As the balance falls, the interest part shrinks and the principal part grows. In this example, the principal part only becomes larger than the interest part in month 233, about 19.5 years in. This schedule is called amortization.
What is added on top: PITI
The formula covers principal and interest only. Most homeowners also pay, often through an escrow account:
- Property tax: at 1.1% a year on a $400,000 home, about $367 a month.
- Homeowners insurance: for example, $1,500 a year, or $125 a month.
- PMI if you put down less than 20%, and HOA fees if they apply.
In the example, the full payment is about $2,514 a month, not $2,023.
How the rate changes the payment
| Rate (30 years, $320,000) | Monthly P&I |
|---|---|
| 5.5% | $1,816.92 |
| 6.5% | $2,022.62 |
| 7.5% | $2,237.49 |
Each percentage point moves the payment by roughly $200 a month, or about $75,000 over the life of the loan.
15 years vs. 30 years
At the same 6.5% rate, a 15-year loan on $320,000 costs $2,787.54 a month, about $765 more, but total interest drops from $408,142 to $181,758. Lenders usually offer lower rates on 15-year loans, which widens the gap: at 5.75%, the payment is $2,657.31 and total interest is $158,316.
The power of extra payments
Paying an extra $200 a month toward principal on the 30-year example pays the loan off in about 23.4 years and saves roughly $105,000 in interest. Ask your lender to apply extra payments to principal, and check that your loan has no prepayment penalty.
Try your own numbers in the mortgage calculator: it shows the full monthly payment, total interest, payoff date and a year-by-year amortization table.
Frequently asked questions
How do I calculate my monthly mortgage payment?
Use M = P × r × (1 + r)^n ÷ ((1 + r)^n − 1), where P is the loan amount, r the monthly rate and n the number of payments. Then add property tax, insurance, PMI and HOA fees.
Why is so much of my payment going to interest?
Interest is charged on the remaining balance, which is highest at the start. As you pay the loan down, more of each payment goes to principal.
How much is a $320,000 mortgage per month?
At 6.5% for 30 years, principal and interest are about $2,022.62 a month, before taxes and insurance.
Do extra payments really make a difference?
Yes. On a $320,000 loan at 6.5%, an extra $200 a month cuts about 6.6 years and $105,000 of interest.
Lawyer for almost 20 years, focused on digital law, and creator of CoringaWeb. He writes the guides and builds the tools on this site.
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