How your mortgage payment is calculated
Your lender spreads the loan over a fixed number of monthly payments. Each payment covers that month’s interest first, and the rest pays down what you owe. Early on, most of your payment goes to interest. Near the end, most of it goes to principal. That’s why the principal bars in the chart grow every year.
The formula is M = P × r(1 + r)n ÷ ((1 + r)n − 1), where P is the loan amount, r is the monthly rate (the annual rate ÷ 12), and n is the number of payments.
What’s in your payment
Lenders call it PITI: principal and interest go to your lender, and property taxes and homeowners insurance are usually collected with your payment and paid from an escrow account. If you put down less than 20% on a conventional loan, you’ll usually pay PMI (private mortgage insurance) too. HOA dues are often paid separately, but they’re part of what you’ll spend each month, so we include them.
Common questions
When does PMI go away?
On a conventional loan, you can ask your lender to cancel PMI once your balance reaches 80% of the home’s original value, if your payment history is good. It must end automatically when your balance is scheduled to reach 78%, or at the midpoint of the loan term. FHA loans charge mortgage insurance under different rules.
Does paying extra lower my monthly payment?
No. Extra payments go straight to principal, so you finish sooner and pay less interest, but the required payment stays the same. Some lenders will lower the payment if you ask them to recast the loan after a large lump sum.
Should I choose a 15-year or a 30-year mortgage?
A 15-year loan has a higher monthly payment but usually a lower rate and far less total interest. A 30-year loan keeps the payment lower and leaves room in your budget. Try both terms above and compare the total interest.
What’s included in the monthly payment?
Principal and interest go to your lender. Property tax and home insurance are usually collected with your payment and held in escrow. PMI applies if you put down less than 20% on a conventional loan, and HOA dues are added if your community has them. Closing costs and utilities are not included.
How accurate is this estimate?
The principal and interest math is exact for a fixed-rate loan. Taxes, insurance and PMI are estimates based on what you enter. Your lender’s Loan Estimate is the official number.
Methodology
- Fixed-rate loan. Interest each month is the balance × (annual rate ÷ 12), rounded to the cent. The last payment absorbs any rounding.
- Property tax is the yearly rate × the home price, split into 12 payments. Insurance is the yearly premium ÷ 12.
- PMI applies when the loan is more than 80% of the price. It’s charged at the yearly rate you enter on the original loan amount, until the balance reaches 78% of the price or the loan reaches its midpoint, as the Homeowners Protection Act requires.
- Extra payments go entirely to principal, starting with the first payment.
- Not included: closing costs, FHA or VA mortgage insurance and funding fees, adjustable rates, and future changes to tax or insurance.
Sources: Consumer Financial Protection Bureau; Homeowners Protection Act of 1998 (12 U.S.C. 4901 et seq.). Last reviewed .