How Mortgage Payments Are Calculated

Ever wondered where that monthly mortgage number actually comes from? Lenders use a single standard formula that turns your loan amount, interest rate, and term into a fixed monthly payment.

Once you understand the formula, you can sanity-check any quote a lender gives you — and see exactly how much of each payment goes to interest versus principal.

The mortgage payment formula

For a fixed-rate mortgage, the monthly payment M is:

• P = loan principal (amount borrowed)
• r = monthly interest rate (annual rate ÷ 12)
• n = total number of payments (years × 12)

Worked example: $300,000 at 6.5% for 30 years

1. Monthly rate: 0.065 ÷ 12 = 0.005417
2. Payments: 30 × 12 = 360
3. (1+r)ⁿ = (1.005417)³⁶⁰ ≈ 7.015
4. M = 300,000 × 0.005417 × 7.015 ÷ (7.015 − 1) ≈ $1,896/month

Why early payments are mostly interest

In the early years, your balance is at its highest, so the interest slice of each fixed payment is huge. On the loan above, the very first payment is about $1,625 interest and only $271 principal. Over time the balance shrinks, the interest slice shrinks, and more of each payment attacks the principal. That schedule is called amortization.

The practical takeaway: even small extra principal payments early in the loan can shave years off the term and save tens of thousands in interest.

Frequently asked questions