How is a mortgage payment calculated?

The short answer: Your Loan Estimate shows a monthly principal-and-interest (P&I) payment that amortizes the loan balance over the term at the stated rate. Your estimated total monthly payment is usually higher because it can also include property taxes, homeowners insurance, mortgage insurance, and other charges.^[1] This page shows the standard amortizing P&I formula with a worked example. It is not a rate quote, loan offer, or advice.

What is principal and interest?

Principal is the amount you borrow. Interest is the lender’s charge for lending that money. On a fully amortizing fixed-rate loan, each scheduled payment covers that month’s interest and reduces principal so the balance reaches zero by the end of the term. The CFPB’s Loan Estimate explainer says principal and interest usually make up the main components of the monthly mortgage payment, and that the total monthly payment is typically more because of taxes and insurance.^[1]

The amortizing P&I formula

For a fixed rate, with monthly compounding as used in standard U.S. mortgage payment schedules:

Let L = loan amount (price minus down payment)
Let r = monthly interest rate = (annual rate as a decimal) ÷ 12
Let n = number of monthly payments = years × 12

Then the monthly P&I payment M is:

M = L · r · (1+r)^n / ((1+r)^n − 1)

If the rate is zero, M = L / n.

It does not include taxes, insurance, mortgage insurance, or HOA fees.

Worked example

Assume a $300,000 loan at 6% annual interest for 30 years (education-only numbers, not an offer):

r = 0.06 ÷ 12 = 0.005
n = 30 × 12 = 360
M = 300000 · 0.005 · (1.005)^360 / ((1.005)^360 − 1) ≈ $1,798.65 principal and interest

That figure is P&I only. If your Loan Estimate also shows escrow for taxes and insurance, or mortgage insurance, those amounts pile on top of P&I in the estimated total monthly payment.^[1]

What else can appear in the total monthly payment?

The CFPB notes that other homeownership charges, such as property taxes and homeowners insurance, may be bundled into the monthly payment through an escrow account, and that mortgage insurance is typically required if the down payment is less than 20 percent of the home’s price.^[1]

For how those lines appear on the form, see how to read your Loan Estimate. For why a payment can change after closing (escrow, adjustable rate, PMI, and related reasons the CFPB lists), see why did my mortgage payment change?. Escrow shortage and cushion rules are covered in escrow analysis, shortage, and deficiency. For when private mortgage insurance must end under federal law, see when PMI must end.

Limits

Estimates on this page are for education only. They are not a loan offer, rate quote, approval, or financial or legal advice. Actual terms depend on the lender, your credit, the property, and location. Verify any loan originator on NMLS Consumer Access using our NMLS check guide.

FAQ

How do lenders calculate the principal-and-interest part of a mortgage payment?

For a standard fully amortizing loan, they use the formula M = L · r · (1+r)^n / ((1+r)^n − 1), where L is the loan amount, r is the monthly rate, and n is the number of months. A zero rate uses M = L / n.

Why is my total monthly payment higher than principal and interest?

The CFPB says the total monthly payment typically includes more than P&I because of taxes, insurance, and, when applicable, mortgage insurance.^[1]

Where do I see these numbers on my Loan Estimate?

Page 1 of the Loan Estimate shows projected payments, including monthly principal and interest and, when applicable, mortgage insurance and escrow. Walk through it in how to read your Loan Estimate.^[1]

Does this page quote today’s mortgage rates?

No. The numbers above are a worked example of the formula only.

This guide is general information, not legal or financial advice.