You've found a house you love. The price tag says $350,000. Your bank offers you a 30-year loan at 6.5% interest. The question on your mind: how much will I actually pay every month?
That number isn't pulled out of thin air. There's a specific formula that every lender uses, and once you understand it, you'll never look at a mortgage statement the same way again.
Let's break it down — no finance degree required.
Every fixed-rate mortgage payment in the world is calculated using the same formula. It's called the amortization formula, and it looks like this:
Where:
It looks intimidating at first glance, but each piece is straightforward. Let's walk through a real example.
Home price: $350,000
Down payment: $50,000 (about 14%)
Loan amount (P): $300,000
Interest rate: 6.5% per year
Loan term: 30 years
Your annual rate is 6.5%, which as a decimal is 0.065. Divide by 12 months:
r = 0.065 / 12 = 0.005417
A 30-year loan means 30 × 12 monthly payments:
n = 30 × 12 = 360 payments
This is the compound growth factor. Take 1.005417 and raise it to the 360th power:
(1.005417)360 = 6.9913
This number represents how much $1 would grow to over 30 years at this rate, compounding monthly.
Now we have all the pieces:
M = 300,000 × [ 0.005417 × 6.9913 ] / [ 6.9913 − 1 ]
M = 300,000 × [ 0.03788 ] / [ 5.9913 ]
M = 300,000 × 0.006321
M = $1,896.20
Your monthly mortgage payment would be $1,896.20. This is the amount you'd pay every month for 30 years. It covers both principal (paying down what you owe) and interest (what the bank charges you for the loan).
Here's where it gets eye-opening. Let's add up what you'd actually pay over 30 years:
Read that again. On a $300,000 loan, you'd pay $382,632 in interest alone — more than the loan itself. This is why understanding your mortgage math matters. Even a small difference in interest rate can mean tens of thousands of dollars.
You might assume that each monthly payment chips away evenly at your loan. It doesn't. In the early years, most of your payment goes toward interest. The principal barely moves. As time passes, the balance shifts — more goes to principal, less to interest.
This is called amortization, and here's what the first few years look like for our example:
| Year | Principal Paid | Interest Paid | Remaining Balance |
|---|---|---|---|
| 1 | $3,520 | $19,235 | $296,480 |
| 2 | $3,753 | $19,002 | $292,727 |
| 5 | $4,505 | $18,250 | $280,188 |
| 10 | $6,088 | $16,666 | $254,017 |
| 20 | $11,116 | $11,638 | $167,512 |
| 25 | $15,028 | $7,726 | $99,003 |
| 30 | $22,098 | $656 | $0 |
Notice the pattern? In Year 1, you paid $19,235 in interest but only $3,520 in principal. By Year 30, it's almost entirely principal. The total payment stays the same — the split just changes over time.
Four things control how much you pay each month:
The more you put down upfront, the less you borrow. A 20% down payment on a $350,000 house means borrowing $280,000 instead of $300,000 — saving you roughly $127 per month.
Even small changes have a huge impact. On a $300,000 loan:
That half-percent jump from 6.5% to 7.0% costs you an extra $100/month and $35,895 over the life of the loan.
A 15-year mortgage has higher monthly payments but far less total interest. That same $300,000 at 6.5%:
You'd pay $717 more per month, but save $212,244 in interest.
The formula above calculates principal and interest only. Your actual monthly payment will likely also include:
Ready to run your own numbers?
Try Calcultron's mortgage calculator — instant results as you type, plus a full downloadable amortization schedule.
Open Mortgage Calculator