How your mortgage payment is calculated
The core of a mortgage payment is principal and interest, worked out with the standard amortization formula from the loan amount, rate and term. Lenders then usually add one-twelfth of your yearly property tax and homeowners insurance, held in an escrow account, plus PMI if your down payment is under 20%.
Monthly P&I = L × i ÷ (1 − (1 + i)−n)
L is the loan amount (price minus down payment), i is the monthly rate (annual rate ÷ 12) and n is the number of payments (years × 12).
Worked example
A $400,000 home with 20% down ($80,000) means a $320,000 loan. At 6.5% for 30 years:
- Principal and interest: about $2,022.62 a month
- Property tax of $4,400 a year adds $366.67, and insurance of $1,800 a year adds $150
- Total: about $2,539 a month, with no PMI because the down payment is 20%
- Interest over 30 years: about $408,142
The same loan over 15 years costs about $2,787.54 a month in principal and interest, but total interest falls to about $181,758.
Ways to lower your payment or total cost
- Put more down to borrow less and avoid PMI.
- Shop several lenders. Even a small rate difference adds up over decades.
- Make extra principal payments, or pay half your payment every two weeks, which adds up to one extra payment a year.
- Review taxes and insurance each year. Shopping for insurance or appealing an assessment can lower your escrow.
Last reviewed October 2026.