How your mortgage payment is calculated
A fixed-rate loan has the same payment every month, but what that payment buys changes over time. Early payments are mostly interest, because interest is charged on a large balance. As the balance shrinks, more of each payment goes to principal. The amortization schedule shows that shift month by month.
- Extra payments go further than you’d expect. Every extra dollar cuts the balance that all future interest is charged on. A modest monthly top-up often takes years off a 30-year mortgage.
- Blank the rate to decode a quote. Enter the loan amount, term and the payment a lender quoted to see the interest rate it implies.
- Budget for the full cost. Add property tax, insurance, PMI and HOA under “More options” to see your total monthly housing payment.
The loan payment formula
M = P × i ÷ (1 − (1 + i)−n)
P is the loan amount, i the monthly rate (APR ÷ 12) and n the number of monthly payments. The term is solved with logarithms. The rate has no algebraic solution, so it’s found by bisection, which always converges. See the methodology.