Mortgage Calculator

How Mortgage Payments Are Calculated

Monthly mortgage payments are determined by the standard amortization formula: M = P[r(1+r)ⁿ] / [(1+r)ⁿ - 1], where P is the loan principal (home price minus down payment), r is the monthly interest rate (annual rate / 12), and n is the total number of monthly payments (years x 12).

Each monthly payment covers two parts: interest on the remaining balance and a portion that reduces the principal. In the early years, most of each payment goes toward interest. As the balance decreases, more of each payment goes toward principal. This gradual shift is called amortization.

Additional costs like property tax, homeowners insurance, and PMI (private mortgage insurance) are typically escrowed into the monthly payment by the lender. While these don't reduce your loan balance, they affect your total monthly housing cost.

Fixed Rate vs Adjustable Rate Mortgages

A fixed-rate mortgage locks in your interest rate for the entire loan term. Your principal and interest payment stays the same every month, making budgeting predictable. Fixed rates are ideal when interest rates are low or you plan to stay in the home long-term.

An adjustable-rate mortgage (ARM) starts with a lower introductory rate for a fixed period (commonly 5, 7, or 10 years), then adjusts periodically based on a market index. ARMs carry more risk since payments can increase significantly, but the lower initial rate can save money if you plan to sell or refinance before the adjustment period.

Common Mortgage Payment Examples