A monthly mortgage payment is not just the loan principal spread evenly over 30 years. Interest, down payment size, private mortgage insurance (PMI), property taxes, and homeowners insurance all factor in. But the core calculation — the principal and interest payment — follows a single formula that you can work out by hand.
The Mortgage Payment Formula
The monthly principal and interest (P&I) payment uses the standard loan amortization formula:
Where:
- M = monthly payment
- P = principal (loan amount after down payment)
- r = monthly interest rate = annual rate ÷ 12
- n = total number of payments = loan term in years × 12
Step-by-Step Example
Home price: $400,000 · Down payment: 20% ($80,000) · Loan: $320,000 · Rate: 6.5% · Term: 30 years
- Monthly rate: 6.5% ÷ 12 = 0.065 ÷ 12 = 0.005417
- Number of payments: 30 × 12 = 360
- Numerator: 0.005417 × (1 + 0.005417)^360 = 0.005417 × 6.848 = 0.03711
- Denominator: (1 + 0.005417)^360 − 1 = 6.848 − 1 = 5.848
- Monthly P&I: $320,000 × (0.03711 ÷ 5.848) = $320,000 × 0.006321 = $2,022/month
💡 Over 30 years at 6.5%, this $320,000 loan costs $728,000 total — you pay $408,000 in interest alone. This is why small rate differences are worth negotiating hard for.
How Interest Rate Affects Your Payment
| Rate | Monthly P&I | Total interest paid | vs. 6.5% baseline |
|---|---|---|---|
| 5.5% | $1,817 | $334,000 | −$74,000 |
| 6.0% | $1,919 | $371,000 | −$37,000 |
| 6.5% | $2,022 | $408,000 | baseline |
| 7.0% | $2,129 | $446,000 | +$38,000 |
| 7.5% | $2,237 | $485,000 | +$77,000 |
Down Payment Impact
Increasing your down payment from 10% to 20% doesn't just lower your monthly payment — it also eliminates the need for PMI and gives you immediate equity.
| Down payment | Loan amount | Monthly P&I | PMI (~0.7%/yr) | Total monthly |
|---|---|---|---|---|
| 5% ($20,000) | $380,000 | $2,402 | +$222 | ~$2,624 |
| 10% ($40,000) | $360,000 | $2,275 | +$210 | ~$2,485 |
| 20% ($80,000) | $320,000 | $2,022 | none | $2,022 |
| 25% ($100,000) | $300,000 | $1,896 | none | $1,896 |
What Is PMI and When Do You Pay It?
Private Mortgage Insurance (PMI) is required when you put down less than 20% on a conventional loan. It protects the lender — not you — if you default. PMI typically costs 0.5%–1.5% of the loan amount per year, added to your monthly payment.
The good news: PMI is not permanent. Once you reach 20% equity in your home (through payments, appreciation, or a combination), you can request cancellation. By law, lenders must automatically cancel PMI when you reach 22% equity based on the original schedule.
The Full Monthly Cost: PITI
Your mortgage payment as quoted by a lender usually refers to principal + interest only. Your actual monthly cost — called PITI — includes four components:
- Principal — the part that reduces your loan balance
- Interest — the lender's fee for lending the money
- Taxes — property taxes escrowed monthly (typically 1–2% of home value per year)
- Insurance — homeowners insurance (~$100–200/month for a typical home)
Add PMI if applicable. For our $400,000 example at 20% down, PITI might look like: $2,022 (P&I) + $500 (taxes at 1.5%/yr) + $150 (insurance) = ~$2,672/month.
Loan Term: 15 vs. 30 Years
| Term | Monthly P&I | Total interest | Rate advantage |
|---|---|---|---|
| 30-year at 6.5% | $2,022 | $408,000 | — |
| 15-year at 5.9% | $2,682 | $162,000 | 0.6% lower rate typical |
The 15-year loan costs $660 more per month but saves $246,000 in interest. The right choice depends on whether that extra $660/month could earn more invested elsewhere, and how much you value being debt-free faster.
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