How to Calculate Mortgage Payment: Complete Guide
Learn the step-by-step process of calculating mortgage payments, understand the formula, and discover what factors affect your monthly payment.
Table of Contents
1. The Mortgage Payment Formula
Standard Mortgage Payment Formula
M = Monthly mortgage payment
P = Principal loan amount
r = Monthly interest rate (annual rate ÷ 12)
n = Total number of payments (loan term in years × 12)
Important Note
This formula calculates only the principal and interest portion of your payment. Your actual monthly payment will also include property taxes, homeowners insurance, and PMI (if applicable).
2. Step-by-Step Calculation
Step 1: Gather Your Information
- Loan amount (principal)
- Annual interest rate
- Loan term in years
- Property taxes (annual)
- Homeowners insurance (annual)
- PMI (if applicable)
Step 2: Calculate Monthly Interest Rate
Example: 6% annual rate ÷ 12 = 0.005 (0.5% monthly)
Step 3: Calculate Total Number of Payments
Example: 30 years × 12 = 360 payments
Step 4: Apply the Formula
Plug your values into the mortgage payment formula:
Step 5: Add Additional Costs
- Property taxes ÷ 12
- Homeowners insurance ÷ 12
- PMI (if applicable)
3. Payment Components Explained
Principal & Interest (P&I)
The core mortgage payment calculated using the formula above.
- Principal: Reduces your loan balance
- Interest: Cost of borrowing money
- Early payments are mostly interest
- Later payments are mostly principal
Additional Costs
These are often included in your monthly payment:
- Property Taxes: Paid to local government
- Insurance: Protects your home investment
- PMI: Required if down payment < 20%
- HOA Fees: If applicable to your property
4. Factors That Affect Your Payment
Loan Amount
Higher loan amounts result in higher monthly payments. A larger down payment reduces your loan amount.
Interest Rate
Even small rate changes significantly impact your payment. Your credit score affects your rate.
Loan Term
15-year loans have higher payments but lower total interest. 30-year loans have lower payments but higher total interest.
Property Taxes
Vary by location and property value. Higher taxes increase your monthly payment.
Insurance Costs
Depend on property value, location, and coverage level. Required by most lenders.
PMI Requirements
Required if down payment is less than 20%. Can be removed once you reach 20% equity.
5. Real-World Examples
Example 1: $300,000 Home, 30-Year Fixed
Loan Details:
- Loan Amount: $300,000
- Interest Rate: 6.5%
- Term: 30 years
- Down Payment: 20% ($60,000)
Monthly Payment:
- Principal & Interest: $1,896
- Property Taxes: $300
- Insurance: $100
- Total: $2,296
Example 2: $200,000 Home, 15-Year Fixed
Loan Details:
- Loan Amount: $200,000
- Interest Rate: 6.0%
- Term: 15 years
- Down Payment: 10% ($20,000)
Monthly Payment:
- Principal & Interest: $1,688
- Property Taxes: $200
- Insurance: $75
- PMI: $100
- Total: $2,063
6. Common Mistakes to Avoid
❌ Forgetting Additional Costs
Many people only calculate principal and interest, forgetting property taxes, insurance, and PMI.
❌ Using Annual Rate Instead of Monthly
Always divide the annual interest rate by 12 to get the monthly rate for calculations.
❌ Not Considering PMI
If your down payment is less than 20%, include PMI in your payment calculation.
❌ Using List Price Instead of Loan Amount
Use the loan amount (purchase price minus down payment) in your calculations, not the full purchase price.
Ready to Calculate Your Payment?
Use our free mortgage calculator for instant, accurate results with detailed breakdowns.