How is a mortgage payment calculated?
Your monthly mortgage payment is made up of four components, commonly referred to as PITI: principal, interest, taxes, and insurance. This calculator focuses on principal and interest — the portion determined by your loan amount, interest rate, and term.
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)
Understanding amortization
A mortgage amortizes over its term, meaning your balance gradually decreases with each payment. But the split between principal and interest changes dramatically over time.
In the early years of a 30-year mortgage, the vast majority of each payment goes toward interest. On a $400,000 loan at 7%, your first payment of roughly $2,661 breaks down as approximately $2,333 in interest and only $328 in principal. By year 25, that same payment is split almost evenly. This is why refinancing or selling early can feel like you have barely made a dent in the balance — because in interest terms, you mostly have not.
15-year vs 30-year mortgage
The two most common mortgage terms are 15 and 30 years, and the trade-offs are significant.
A 30-year mortgage has lower monthly payments, preserving cash flow for other investments, savings, or expenses. The downside is that you pay substantially more interest over the life of the loan.
A 15-year mortgage has higher monthly payments but typically comes with a lower interest rate and allows you to build equity much faster. On a $400,000 loan, the difference in total interest paid can exceed $200,000.
Neither is universally correct. If you can reliably invest the payment difference at a higher return than your mortgage rate, the 30-year often makes mathematical sense. If you value owning your home outright sooner, the 15-year is compelling.
How extra payments reduce your loan
Making even small additional payments toward principal each month can dramatically shorten your loan term and reduce total interest paid.
| Extra/month | Interest saved | Years cut |
|---|---|---|
| $200 | $60,000+ | ~4 years |
| $500 | $120,000+ | ~8 years |
$400,000 mortgage at 7% over 30 years.
How your interest rate affects total cost
A half-percent difference in interest rate has a larger impact than most buyers realize. On a $400,000 30-year mortgage, the difference between 6.5% and 7% is approximately $130/month and over $46,000 in total interest.
This is why shopping for the best rate — even spending a few weeks comparing lenders — is one of the highest-return activities a homebuyer can do. A single percentage point difference on a $400,000 loan is worth roughly $90,000 over 30 years.
How much house can you afford?
A widely used rule is that your total housing costs should not exceed 28% of your gross monthly income, and your total debt payments should not exceed 36%. At current rates, a household earning $100,000 annually could comfortably afford a mortgage payment of roughly $2,333/month, corresponding to a loan of approximately $350,000 at 7% over 30 years — before taxes, insurance, and a down payment.