How to Calculate Mortgage Payments

The Mortgage Payment Formula

When you take out a mortgage, your monthly payment is determined by three key factors: the loan amount (principal), the interest rate, and the loan term. The standard formula used by lenders is:

M = P [ r(1+r)^n ] / [ (1+r)^n - 1 ]

Where M is the monthly payment, P is the principal, r is the monthly interest rate (annual rate divided by 12), and n is the total number of payments.

Breaking Down the Variables

• Principal (P) — The total amount you borrow after subtracting your down payment from the purchase price.
• Monthly interest rate (r) — If your annual rate is 6%, your monthly rate is 0.06 / 12 = 0.005.
• Number of payments (n) — A 30-year mortgage has 360 monthly payments; a 15-year mortgage has 180.

A Practical Example

Suppose you buy a home for $350,000, put 20% down ($70,000), and finance $280,000 at 6.5% for 30 years. Your monthly interest rate is 0.005417, and you have 360 payments. Plugging into the formula, your monthly principal and interest payment would be approximately $1,770.

Keep in mind this does not include property taxes, homeowners insurance, or PMI, which can add several hundred dollars to your total monthly obligation.

How Interest Rates Affect Your Payment

Even small rate changes have a big impact over time. On a $280,000 loan for 30 years, going from 6% to 7% raises your monthly payment by about $186 and adds over $67,000 in total interest paid over the life of the loan. This is why shopping for the best rate matters enormously.

15-Year vs. 30-Year Mortgages

A 15-year mortgage carries higher monthly payments but dramatically reduces total interest. On our $280,000 example at 6%, a 30-year loan costs roughly $324,000 in interest, while a 15-year loan costs only about $146,000 — saving you nearly $178,000.

Try our mortgage calculator to run your own numbers and see how different rates and terms affect your payment.