How mortgage payments are calculated (the math)

What you actually pay each month

Your lender’s monthly bill almost always contains four components — the well-known acronym PITI:

1. Principal — the part of your payment that reduces the loan balance.
2. Interest — the cost of borrowing, computed monthly on the remaining balance.
3. Taxes — your share of annual property tax, usually escrowed at 1/12 per month.
4. Insurance — homeowners insurance and (if your down payment is below 20%) PMI.

The first two follow a strict mathematical formula and never change for a fixed-rate loan. The second two can drift over time as your county reassesses your property and your insurer adjusts premiums.

The amortization formula

For a fully-amortizing fixed-rate mortgage, the constant monthly payment is:

M = P × r / (1 − (1 + r)^−n)

Where:

• P is the loan principal at origination (home price minus down payment).
• r is the monthly interest rate, equal to the quoted annual percentage rate divided by 12.
• n is the total number of monthly payments — years × 12.

For a $300,000 loan at 6.5% APR for 30 years:

• P = 300,000
• r = 0.065 / 12 ≈ 0.005417
• n = 360
• M ≈ $1,896.20 per month

Multiply M by 360 and you get $682,632 — meaning the lender will collect roughly $382,632 in interest over the life of the loan, more than the original principal. That fact alone explains why prepayment can save so much money.

How interest and principal split each month

Each month, the lender computes the interest on the current balance:

interest_this_month = balance × r
principal_this_month = M − interest_this_month
new_balance = balance − principal_this_month

Because the balance shrinks slightly every month, the interest portion shrinks and the principal portion grows. In year 1 of a 30-year loan, more than 80% of each payment goes to interest. By year 25, more than 80% goes to principal. Our mortgage calculator shows your full schedule.

Adding T and I — the full PITI

Most lenders quote PITI rather than just principal-and-interest because that’s what they actually withdraw from your account.

• Property tax: typically 0.5% to 2.5% of home value per year, paid in two annual installments. Lenders add ~1/12 of that to your monthly payment and hold it in escrow until taxes are due.
• Homeowners insurance: required by virtually every lender. National average is around $1,400/year (~$117/mo), but varies hugely by location and coverage.
• PMI: charged when your loan-to-value ratio is above 80%. Typical PMI costs 0.3% to 1.5% of the loan balance per year. By federal law it auto-cancels at 78% LTV.
• HOA dues: not collected by the lender, but you must add them to evaluate true monthly housing cost.

Why your lender’s number may differ

A few common reasons our calculator and your lender’s Loan Estimate disagree slightly:

• Day-count conventions: some lenders use actual/365 instead of a clean monthly cycle.
• Rounding: the formula returns fractions of a cent; lenders round to the dollar or up to the nearest cent.
• Escrow padding: lenders may collect 2 months of taxes and insurance up-front as a cushion.
• PMI banding: PMI rates are tied to credit-score bands; the lender knows yours, the calculator does not.

If our number is more than $5 off the lender’s, ask for the breakdown — the difference is almost always one of the four items above.

What changes the monthly payment most

Pulling on each lever in isolation, here is roughly how a 30-year, $300,000 loan reacts:

The takeaway: rate matters a lot, term matters more, and the often-overlooked property-tax line can rival a full percentage point of rate in a high-tax county.

Frequently asked

Why is my early payment almost all interest? Because interest is charged on the remaining balance, which is highest in month 1. The schedule isn’t “front-loaded” in any unfair sense — it is mechanically determined by the formula.

Does paying biweekly really save money? Yes — only because 26 half-payments per year add up to one extra full payment annually, accelerating principal payoff. See our prepayment comparator for the math.

Are my interest payments tax-deductible? Mortgage interest on a primary residence may be deductible if you itemize. Consult a CPA — rules change.