Your mortgage payment is the largest single line item in most household budgets for decades. Knowing exactly how it is calculated — not just plugging numbers into a calculator — means you can compare offers, understand why paying extra principal matters, and avoid surprises when your lender hands you a statement. Here is the math, the full payment picture, and the key decisions it informs.
What changed in 2026
- Mortgage rates remain elevated compared to the 2020–2021 lows, making the rate you lock in significantly more consequential than a decade ago.
- Affordability calculators improved on most bank and brokerage sites, but many still omit property taxes and insurance from the headline number — misleading buyers.
- ARM products returned as some buyers seek lower initial rates; knowing how to calculate ARM payments (and their reset caps) is more important again.
The amortization formula
The standard fixed-rate mortgage uses this formula:
M = P × [r(1+r)^n] ÷ [(1+r)^n − 1]
Where:
- M = monthly payment
- P = loan principal (amount borrowed)
- r = monthly interest rate (annual rate ÷ 12)
- n = number of monthly payments (loan term in years × 12)
Example: $400,000 loan, 6.75% annual rate, 30-year term.
- r = 6.75% ÷ 12 = 0.5625% = 0.005625
- n = 30 × 12 = 360
- M = 400,000 × [0.005625 × (1.005625)^360] ÷ [(1.005625)^360 − 1]
- M ≈ $2,594/month (principal + interest only)
PITI: the full monthly cost
Principal and interest are only part of what you pay. The full payment — what lenders call PITI — includes:
| Component |
What it is |
Typical range |
| Principal |
Loan balance reduction |
Varies by amortization |
| Interest |
Cost of borrowing |
Varies by rate |
| Taxes |
Property taxes, escrowed monthly |
~0.5–2% of home value/year |
| Insurance |
Homeowner's insurance, escrowed |
~$100–250/month typical |
| PMI (if applicable) |
Private mortgage insurance if down payment <20% |
~0.5–1.5% of loan/year |
For the $400,000 loan above, if property taxes run $6,000/year ($500/month) and insurance runs $150/month, total PITI ≈ $3,244/month — 25% more than the base P&I figure.
15-year vs. 30-year: the total cost difference
| Loan |
Rate |
Monthly P&I |
Total interest paid |
| $400,000, 30-year |
6.75% |
~$2,594 |
~$534,000 |
| $400,000, 15-year |
6.25% |
~$3,430 |
~$217,000 |
The 15-year payment is ~$836/month higher but saves roughly $317,000 in interest over the life of the loan. Whether that trade-off makes sense depends entirely on your cash flow and what you'd do with the $836/month difference.
How to calculate your payment step by step
- Determine the loan amount — home price minus your down payment.
- Find your rate — get pre-qualified first; use current market rates as a planning estimate.
- Apply the formula — or use a reputable mortgage calculator that shows full amortization.
- Add property taxes — your county assessor's site lists the current rate; divide annual tax by 12.
- Add insurance — get an insurance quote; budget $100–250/month for most properties.
- Add PMI if applicable — if your down payment is less than 20%, PMI is typically 0.5–1.5% of the loan amount annually.
- Apply the 28% rule as a sanity check — PITI should ideally be under 28% of gross monthly income.
How extra principal payments work
Every extra dollar you pay toward principal reduces the balance the next month's interest is calculated on. This creates compounding savings:
- On the $400,000 / 6.75% / 30-year loan, paying an extra $300/month toward principal cuts the loan term to ~24 years and saves ~$130,000 in interest.
- Even a one-time lump-sum payment of $10,000 in year 1 reduces total interest by roughly $25,000–35,000 on a 30-year mortgage.
Common mistakes
Using only P&I to budget. Lenders often quote the base payment, but PITI is your real cost. New buyers frequently underestimate total housing costs by 20–30%.
Comparing monthly payments without comparing total interest. A lower payment from a longer term often means dramatically more interest paid overall.
Ignoring rate impact. On a $400,000 loan, 1% difference in rate means roughly $240/month and ~$85,000 in total interest over 30 years. Shop aggressively.
Not accounting for PMI removal. PMI drops off when you reach 20% equity. Factor in when that happens — it's effectively a rate drop on your payment.
What to skip
- Focusing only on the monthly payment when choosing between loan options — always look at the amortization table and total interest paid.
- Interest-only loans for a primary residence without understanding the balloon payment mechanics; they reduce payments now but create risk later.
- ARMs without modeling the worst-case rate cap — know your cap structure before choosing an adjustable rate.
FAQ
How does the lender decide my rate?
Your credit score, down payment, debt-to-income ratio, loan type (conventional, FHA, VA), and prevailing market rates all factor in. Higher credit scores and larger down payments generally unlock lower rates.
What is an escrow account?
Lenders typically collect 1/12 of your annual property tax and insurance every month, hold it in escrow, and pay those bills on your behalf. This is included in PITI and means you don't face a large lump sum.
Does rounding matter in mortgage calculations?
Slightly — lenders calculate to the cent, and rounding at any step introduces small errors. For planning purposes, being within $5–10 of the actual payment is fine.
Can I pay off a mortgage early?
Most conventional loans allow early payoff without penalty. Verify your loan agreement; some products have prepayment penalties in the first few years.
Where to go next
See How to choose a mortgage in 2026, How to save for a down payment in 2026, and Fixed vs adjustable mortgage in 2026.