A mortgage payment is the fixed amount you pay each month to repay a home loan, covering both interest and principal. The standard formula is M = P × r × (1 + r)^n ÷ ((1 + r)^n − 1), where P is the loan amount, r is the monthly interest rate and n is the number of monthly payments. For a 300,000 loan at 6.5% over 30 years, the monthly payment is about 1,896.20.

The Mortgage Payment Formula Explained

The formula is M = P × r × (1 + r)^n ÷ ((1 + r)^n − 1), and each letter has a simple meaning:

  • M is the monthly payment of principal and interest.
  • P is the principal, the amount you borrow.
  • r is the monthly interest rate: the annual rate divided by 12. A 6.5% annual rate becomes 0.065 ÷ 12 = 0.005417.
  • n is the number of payments: the term in years multiplied by 12. A 30-year loan has 360 payments.

This is the same formula that applies to any amortising loan, which is why it also appears in our guide to how to calculate loan EMI. Amounts below use no currency symbol, so they work in any currency.

A Worked Example

Take a 300,000 loan at 6.5% for 30 years. The monthly rate is r = 0.005417 and n = 360. The growth factor (1 + r)^360 is about 6.9918. Then:

M = 300,000 × 0.005417 × 6.9918 ÷ (6.9918 − 1) = 1,896.20

Over 360 payments you repay 1,896.20 × 360 = 682,633. Subtract the 300,000 you borrowed and the total interest is 382,633, more than the original loan. That surprising number is the main reason it pays to understand how the loan works before you sign.

Where Your Payment Goes: Amortisation

Interest is charged on the balance you still owe, so early payments are mostly interest. In the first month, interest is 300,000 × 0.065 ÷ 12 = 1,625.00, and only 271.20 of your 1,896.20 payment reduces the principal. Across the whole first year, about 19,401 of the 22,754 you pay is interest, and only about 3,353 repays the loan.

After five years of payments, the balance is still about 280,833, which means you have repaid only about 19,167, or 6.4%, of the amount borrowed. As the balance falls, the interest portion shrinks and the principal portion grows. This is called amortisation, and it explains why extra payments made early in the loan are so powerful.

What Else Is in a Monthly Housing Payment

The formula gives only principal and interest. Your real monthly housing cost often includes more:

  • Property taxes, usually collected monthly and held in an escrow account in some countries.
  • Home insurance, which most lenders require.
  • Mortgage insurance, such as PMI in the United States, which commonly applies when your deposit is below 20% of the price. It is often in the range of roughly 0.3% to 1.5% of the loan per year, depending on your credit and deposit.
  • Homeowners association or service charges, if the property has them.

Always ask a lender for the full monthly figure, not only the principal-and-interest payment.

How Term and Rate Change the Payment

A shorter term raises the payment but cuts the interest dramatically. As an illustration, suppose a 15-year loan carries a lower rate of 5.75% (shorter loans are often priced lower). The payment on 300,000 is about 2,491.23 a month, which is 595 more than the 30-year payment. But total interest falls to about 148,421, compared with 382,633, a saving of roughly 234,000. If you can afford the higher payment, the shorter term is usually far cheaper.

Five Ways to Pay Less Interest

  • Make extra principal payments. Adding 200 a month to the 30-year example pays the loan off in about 23 years (277 months) instead of 30 and saves roughly 103,400 in interest. Check your contract for prepayment penalties first.
  • Choose a shorter term if your budget allows, as shown above.
  • Compare lenders and improve your credit. A rate of 6.25% instead of 6.5% lowers the payment to 1,847.15, which is 49.05 less every month.
  • Think carefully about discount points. Paying one point (1% of the loan, here 3,000) to cut the rate by about 0.25 percentage points saves roughly 49 a month, so you break even after about 61 months, or just over five years. It only makes sense if you keep the loan longer than that.
  • Increase your deposit. A larger deposit reduces P, and in some markets it also avoids mortgage insurance.

Fixed Rate or Adjustable Rate?

With a fixed-rate mortgage, the payment stays the same for the whole term. An adjustable-rate mortgage (ARM) usually starts with a lower rate that resets after an initial period. At each reset, the lender recalculates the payment using the same formula, but with the remaining balance and remaining term. Check the rate caps and make sure you could afford the payment at the highest possible rate.

How Much Can You Afford?

A common guideline is the 28/36 rule: keep housing costs below about 28% of your gross monthly income and total debt payments below about 36%. Lenders may approve more than that, but approval is not the same as comfort. Leave room for maintenance, which often averages around 1% of the home's value per year. Our guide to renting versus buying shows how to compare the full cost of owning with renting.

Frequently Asked Questions

Is the interest rate the same as the APR?

No. The interest rate is the cost of borrowing the money. The APR also includes certain lender fees and is designed to help you compare offers on a like-for-like basis.

Does paying every two weeks save interest?

Paying half your monthly payment every two weeks means 26 half-payments, equal to 13 full payments a year, so you make one extra payment annually. That shortens the loan and cuts interest, provided your lender applies each payment promptly.

Can I use the same formula for a car or personal loan?

Yes. Any loan with fixed monthly payments and a fixed rate follows the same formula.

Test before you commit

Run your loan at three terms and two rates, add an extra payment you could keep up, and compare the total interest each time. Then ask the lender for the APR and for any prepayment penalty in writing.