Mortgage Calculator Guide: How Your Payment Is Actually Calculated
The exact amortization formula behind every mortgage payment, a full worked example, and how PITI (principal, interest, taxes, insurance) changes what you actually owe each month.
Every fixed-rate mortgage or loan uses the same formula to turn a loan amount, interest rate, and term into a monthly payment: M = P × [r(1+r)^n] ÷ [(1+r)^n − 1].
What each variable means
- P — the loan amount (home price minus down payment).
- r — your monthly interest rate (annual rate ÷ 12).
- n — total number of monthly payments (loan term in years × 12).
Worked example
A $400,000 loan at 7% over 30 years: monthly rate r = 0.07 ÷ 12 = 0.005833, n = 360. The formula gives a payment of $2,661.21/month, totaling $958,035.59 over the full term — of which $558,035.59 is interest, more than the original loan amount itself.
Why the same payment builds equity slowly, then fast
Interest each month is charged on the current balance, not the original loan amount, so a fixed payment covers mostly interest early on (when the balance is largest) and mostly principal near the end (when the balance is smallest). This is also why the loan term has such a large effect on total interest — a shorter term means less time for interest to accumulate on a large balance.
PITI: what your real monthly payment includes
Principal & interest is only part of a typical house payment. Property tax, homeowners insurance, and — if your down payment is under 20% — PMI are usually added on top, often collected monthly and escrowed by your lender. HOA dues are separate from the loan entirely but still affect your real monthly budget.
The Mortgage & Loan Calculator runs this exact formula and lets you add property tax, insurance, PMI, and HOA to see your full estimated monthly payment, not just principal and interest.