How to Calculate Your Mortgage Payment
A mortgage payment consists of four main components, often called PITI: Principal (the loan amount), Interest (the cost of borrowing), Taxes (property taxes), and Insurance (homeowner's insurance).
The Mortgage Payment Formula
The principal and interest portion of your monthly payment is calculated using the standard amortization formula:
M = P × [r(1+r)^n] / [(1+r)^n – 1]
Where:
- M = Monthly payment
- P = Principal (loan amount)
- r = Monthly interest rate (annual rate ÷ 12)
- n = Total number of payments (years × 12)
Tips for Getting the Best Mortgage Rate
- Improve your credit score — Scores above 740 typically get the best rates
- Make a larger down payment — 20% or more avoids PMI and may get better rates
- Shop multiple lenders — Rates can vary by 0.5% or more between lenders
- Consider points — Paying discount points upfront can lower your rate
- Lock your rate — Once you find a good rate, lock it in to protect against increases
Understanding Your Amortization Schedule
An amortization schedule shows how each payment is split between principal and interest over the life of the loan. In the early years, most of your payment goes toward interest. Over time, more goes toward paying down the principal. Making extra payments toward principal can save thousands in interest and shorten your loan term.