How the monthly payment is calculated
We use the standard amortization formula used by banks and lenders:
M = P · r(1+r)ⁿ / ((1+r)ⁿ − 1)
Where P is the loan principal (price minus down payment), r is the monthly interest rate (annual rate ÷ 12) and n is the total number of monthly payments. Property tax and insurance are divided by 12 and added to give your total monthly housing cost.
How to calculate a mortgage payment by hand
Example: a $400,000 home with 20% down, a 6.5% fixed rate and a 30-year term.
- Find the loan amount: $400,000 × (1 − 0.20) = $320,000.
- Convert the annual rate to a monthly rate: 6.5% ÷ 12 = 0.541667%, or r = 0.0054167.
- Count the payments: 30 years × 12 = n = 360.
- Work out (1 + r)ⁿ: 1.0054167³⁶⁰ ≈ 6.9918.
- Plug into the formula: $320,000 × 0.0054167 × 6.9918 ÷ (6.9918 − 1) = $2,022.62 per month for principal and interest.
- Add escrow items: $4,800 a year in property tax is $400 a month and $1,500 a year in insurance is $125 a month, so the full payment is $2,547.62.
Over 360 payments you would pay $728,142.36 in total, of which $408,142.36 is interest. In the first month, $1,733.33 of the payment is interest and only $289.28 reduces the balance. That ratio slowly flips as the balance falls.
Monthly payment by rate and term
| Rate | 15 years | 20 years | 30 years | Total interest, 30 years |
|---|---|---|---|---|
| 5.0% | $2,372.38 | $1,979.87 | $1,610.46 | $279,767.35 |
| 5.5% | $2,451.25 | $2,063.66 | $1,703.37 | $313,212.12 |
| 6.0% | $2,531.57 | $2,149.29 | $1,798.65 | $347,514.57 |
| 6.5% | $2,613.32 | $2,236.72 | $1,896.20 | $382,633.47 |
| 7.0% | $2,696.48 | $2,325.90 | $1,995.91 | $418,526.69 |
| 7.5% | $2,781.04 | $2,416.78 | $2,097.64 | $455,151.67 |
At 6.5%, the 15-year loan costs $717.12 more per month than the 30-year loan but saves $212,235.49 in interest ($170,397.98 versus $382,633.47).
Tax and insurance
Property taxes and home insurance vary by country and location. The defaults shown are typical figures for your region; replace them with quotes for the property you are considering for a more accurate total.
Common mistakes
- Budgeting on principal and interest alone. Lenders usually collect tax and insurance with each payment, so the total line is the number to plan around.
- Forgetting costs outside the payment. Closing costs, moving, repairs and maintenance all come from the same savings as your down payment.
- Comparing loans by rate only. Points and lender fees change the true cost. Compare official loan estimates side by side.
- Assuming the payment never changes. On a fixed-rate loan, principal and interest stay the same, but tax and insurance can rise each year.
The result is an estimate for planning, not a loan offer or financial advice. Your lender's figures are the ones that count.