Understanding Your Mortgage Payment
A mortgage is a long-term loan used to finance the purchase of real estate. The primary goal for most homeowners is to understand their monthly mortgage payment. This payment typically includes several components, but the most significant ones are the principal and interest (P&I).
Principal vs. Interest
Principal is the amount of money you borrowed to buy your home. Each month, a portion of your payment goes towards reducing this original loan amount.
Interest is the cost of borrowing the money. This is essentially the fee the lender charges you for lending you the principal amount. It's calculated based on the outstanding balance of your loan.
The Mortgage Payment Formula
The standard formula to calculate the monthly mortgage payment (M) for a fixed-rate loan is:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]
Where:
- M = Your total monthly mortgage payment (principal and interest)
- P = The principal loan amount (the amount you borrowed)
- i = Your monthly interest rate (annual interest rate divided by 12)
- n = The total number of payments over the loan's lifetime (loan term in years multiplied by 12)
Understanding this formula helps you see how changes in loan amount, interest rate, and loan term affect your monthly expenses. Use the calculator below to experiment with different scenarios and see how your mortgage payment changes.
Mortgage Payment Calculator
Your Estimated Monthly Payment:
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