The mortgage payment formula
Most home loans are repaid in equal monthly amounts. The payment is calculated with the standard amortisation formula:
M = L × r ÷ (1 − (1 + r)−n)
M is the monthly payment, L the loan amount, r the monthly interest rate (yearly rate ÷ 12 ÷ 100) and n the number of monthly payments.
Worked example
A 350,000 home with a 20% down payment needs a loan of 280,000. At 6.25% over 30 years, the monthly payment is about 1,724. Over 360 payments you would pay around 340,600 in interest, which is more than the loan itself. Adding 3,000 of yearly property tax and 1,200 of insurance brings the monthly cost to about 2,074.
How each payment is split
Early payments are mostly interest, because interest is charged on a large balance. As the balance falls, more of each payment goes towards the loan itself. The yearly schedule below the calculator shows this shift. It is also why extra payments made early in a loan save the most interest.
Ways to lower your monthly payment
- Put more down. A bigger down payment means a smaller loan, and many lenders offer better rates when you borrow less than 80% of the home's value.
- Choose a longer term. Payments drop, but you pay much more interest overall. Compare 25 and 30 years in the calculator to see the trade-off.
- Improve the rate. Even 0.5% makes a big difference over decades. Compare offers from several lenders.
15-year vs 30-year mortgage
With the same 280,000 loan at 6.25%, a 15-year term costs about 2,401 a month but only around 152,100 in interest. The 30-year term costs 677 less each month but more than double the interest. Shorter terms often come with lower rates too, which widens the gap further.
What this calculator doesn't include
Real loans can include arrangement fees, mortgage insurance, variable rates and local taxes. Use the result as a planning estimate and ask your lender for an official quote. This page is not financial advice.
Frequently asked questions
How much house can I afford?
Many lenders suggest keeping your total monthly housing cost below about 28% to 35% of your gross monthly income. Check your lender's own rules.
What is amortisation?
It is the process of paying off a loan in regular payments that cover both interest and part of the balance.
Does the calculator handle variable rates?
No. It assumes the rate stays the same for the whole term. For a variable rate, try a few different rates to see the range.
Why is so much of my early payment interest?
Interest is charged on the remaining balance, which is highest at the start of the loan.
What happens if I make extra payments?
Extra payments reduce the balance faster, which cuts total interest and can shorten the loan. Check whether your lender charges a fee for this.
Last reviewed on by the Dailycaltor team.