How a mortgage payment is calculated
Your monthly mortgage payment has two main components: principal and interest. The formula that determines this is called the amortization formula:
M = P × [r(1+r)ⁿ] / [(1+r)ⁿ - 1]
Where:
- M = monthly payment
- P = loan amount (home price minus down payment)
- r = monthly interest rate (annual rate ÷ 12)
- n = total number of payments (years × 12)
For a $320,000 loan at 6.5% over 30 years:
- Monthly rate: 6.5% ÷ 12 = 0.5417%
- Total payments: 30 × 12 = 360
- Monthly payment: $2,023
The true cost of a home includes more than P&I
Most mortgage calculators show only principal and interest. Your actual monthly housing cost includes:
Property tax
Typically 1–2% of home value annually, divided by 12. On a $400,000 home at 1.2%, that's $400/month. Property tax varies enormously by location — some Texas counties exceed 2.5%, while Hawaii averages around 0.3%.
Homeowner's insurance
Typically $100–200/month for a median-priced home. Required by lenders. Varies by home age, location, and coverage level.
PMI (Private Mortgage Insurance)
Required when your down payment is less than 20%. Typically 0.5–1% of the loan amount annually. On a $320,000 loan at 0.7%, that's $187/month — automatically removed once you reach 20% equity.
HOA fees
If your home is in a homeowner's association. Can range from $50 to $1,000+ per month depending on the community.
Total monthly cost example for a $400,000 home:
| Component | Monthly |
|---|---|
| Principal & Interest (6.5%, 30yr) | $2,023 |
| Property Tax (1.2%) | $400 |
| Home Insurance | $150 |
| PMI (10% down, 0.7%) | $210 |
| Total | $2,783 |
How down payment affects everything
The down payment percentage dramatically impacts your mortgage in three ways:
Loan amount: Every 5% more down on a $400,000 home reduces your loan by $20,000 and saves roughly $60–90 in monthly P&I.
PMI: Down payments below 20% trigger PMI. On a $400,000 home, putting 20% down instead of 10% eliminates ~$210/month in PMI.
Interest rate: Lenders typically offer slightly better rates to borrowers with larger down payments because they represent lower risk.
Fixed vs adjustable rate mortgages
Fixed-rate mortgage
Your interest rate never changes. Monthly P&I payment is identical for the entire loan term. Provides predictability and protection against rising rates.
Best for: buyers who plan to stay in the home long-term, or when rates are historically low.
Adjustable-rate mortgage (ARM)
Rate is fixed for an initial period (typically 5 or 7 years), then adjusts annually based on a benchmark rate plus a margin. Common types: 5/1 ARM, 7/1 ARM.
5/1 ARM: Fixed for 5 years, adjusts annually afterward. Usually starts 0.5–1% lower than a 30-year fixed. If rates rise significantly, payments can increase substantially.
Best for: buyers who plan to sell or refinance before the adjustment period, or when rates are expected to fall.
15-year vs 30-year mortgage
| 15-Year | 30-Year | |
|---|---|---|
| Monthly payment ($320K @ 6%) | $2,703 | $1,919 |
| Total interest paid | $166,595 | $370,784 |
| Interest savings | $204,189 | — |
| Monthly cost difference | +$784 | — |
The 15-year mortgage pays off $204,189 less in interest, but requires $784 more per month. The decision depends on whether you can comfortably afford the higher payment and whether the interest savings outweigh alternative uses for that $784 (investing, paying other debt).
How extra payments dramatically reduce total interest
Making even small extra principal payments early in the loan has an outsized effect because you reduce the principal on which future interest is calculated.
Example: $320,000 loan at 6.5%, 30 years
- No extra payment: 360 months, $409,236 total interest
- $100/month extra: 322 months (-38 months), $355,800 total interest (save $53,436)
- $300/month extra: 278 months (-82 months), $289,740 total interest (save $119,496)
How to calculate your mortgage payment free
- Go to Mortgage Calculator
- Enter home price, down payment, loan term, and interest rate
- Optionally add property tax, insurance, HOA, and PMI
- See your complete monthly payment breakdown instantly
- Check the amortization schedule for year-by-year payoff details
- Test extra payment scenarios to see interest savings