How to Calculate Mortgage Payment: The Complete Guide
Updated June 2026 · 7 min read
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Whether you are buying your first home or refinancing, understanding how mortgage payments work is essential. A mortgage payment is not random — it follows a precise mathematical formula. Once you know the formula, you can evaluate any loan offer instantly.
The Mortgage Payment Formula
M = P [ r(1 + r)^n ] / [ (1 + r)^n - 1 ]
M = monthly payment · P = loan principal · r = monthly interest rate (annual rate / 12) · n = total number of payments (years × 12)
A Real Example: $320,000 Loan at 6.5% for 30 Years
Let us walk through the math:
- P = $320,000 (home price minus down payment)
- r = 0.065 / 12 = 0.0054167
- n = 30 × 12 = 360 payments
M = 320,000 × [0.0054167 × (1.0054167)^360] / [(1.0054167)^360 - 1] = $2,022.62
Your monthly principal and interest payment is about $2,023. Over 30 years, you will pay approximately $408,000 in total interest — more than the original loan amount.
What Makes Up a Mortgage Payment?
Your actual monthly housing payment includes more than just principal and interest. Here is the full breakdown:
- Principal — The amount you borrowed. Each payment chips away at this balance.
- Interest — The cost of borrowing. Front-loaded: early payments are mostly interest.
- Property Taxes — Typically 1-2% of home value per year, paid monthly through escrow.
- Homeowners Insurance — Usually $800-1,500/year, also escrowed monthly.
- PMI (Private Mortgage Insurance) — Required if down payment is less than 20%. Costs 0.5-1.5% of the loan annually.
- HOA Fees — If applicable, paid separately or through escrow.
How Loan Term Affects Your Payment
The same $320,000 loan at 6.5% looks very different at different terms:
| Term | Monthly Payment | Total Interest |
|---|---|---|
| 30 years | $2,023 | $408,000 |
| 20 years | $2,386 | $252,000 |
| 15 years | $2,788 | $181,000 |
| 10 years | $3,633 | $116,000 |
A 15-year term saves $227,000 in interest compared to a 30-year, but costs $765 more each month. The trade-off is cash flow vs. total cost.
How Much Mortgage Can You Afford?
The 28/36 rule is a widely-used guideline:
- 28% front-end: Housing costs (mortgage + taxes + insurance) should not exceed 28% of your gross monthly income.
- 36% back-end: Total debt payments (housing + car loans + student loans + credit cards) should not exceed 36% of gross income.
Example: earning $8,000/month gross. 28% = $2,240 max housing payment. 36% = $2,880 max total debt payments.