How to Calculate Mortgage Payments: Formula and Example

To calculate a mortgage payment, you need three numbers: the loan amount, the annual interest rate, and the number of years. A $378,000 loan at 7.4% over 30 years has a principal-and-interest payment of $2,617.20 a month.

Key points:

• The standard formula is M = P × r(1 + r)^n ÷ ((1 + r)^n − 1).
• r is the annual rate divided by 12. n is the number of years times 12.
• In the first years, most of each payment goes to interest, not to the balance.
• The formula covers principal and interest only. Property taxes, homeowners insurance and any mortgage insurance are added on top in most escrowed loans.

The formula, step by step

The Consumer Financial Protection Bureau (CFPB) explains the same amortization math in its mortgage guides. Here is how to use it.

Step 1: Convert the rate to a monthly rate. Divide the annual rate by 12. A 7.4% rate becomes 7.4 ÷ 12 = 0.617% per month, or 0.006167 as a decimal. Use the decimal in the formula.

Step 2: Count the payments. Multiply the years by 12. A 30-year loan has 30 × 12 = 360 monthly payments.

Step 3: Raise (1 + r) to the power of n. This is the step most people get wrong, so use a calculator. Most phone calculators and spreadsheets have a power key, and in Excel you can use =PMT(rate/12, years*12, -loan) to get the same answer.

Step 4: Plug the numbers in. Multiply the loan by r and by the power term from Step 3, then divide by the power term minus 1.

The result is a fixed payment that stays the same every month. The split between interest and principal changes every month, though, which is what an amortization schedule shows.

A worked example: $378,000 at 7.4% for 30 years

Take a $420,000 home with 10% down. That leaves a $378,000 loan. Freddie Mac's Primary Mortgage Market Survey put the average 30-year fixed rate at 7.40% for the week of October 15, 2026, so we use that rate here.

Item	Value
Loan amount (P)	$378,000
Annual rate	7.40%
Monthly rate (r)	0.6167%
Number of payments (n)	360
Monthly principal and interest	$2,617.20
Interest in the first payment	$2,331.00
Principal in the first payment	$286.20
Total paid over 30 years	$942,190.43
Total interest over 30 years	$564,190.43

Look at the first payment. The interest is $2,331.00 because 7.4% of $378,000, divided by 12, is that amount. Only $286.20 reduces the balance. The balance drops a little each month, so the interest portion shrinks and the principal portion grows.

Over 30 years you pay $942,190.43 in total. That means you pay $564,190.43 in interest, which is more than the original loan. This is the main reason a lower rate or a shorter term saves so much money.

You can check any of these numbers with an amortization schedule calculator. Enter the same loan, rate and term, and compare the first-year totals with the table above.

Why the early years feel so expensive

Interest always starts from the full balance. If you owe $378,000, the first month's interest is large no matter how carefully you planned. Each extra dollar you put toward principal lowers next month's interest a little, which is why early extra payments matter more than late ones.

Run the same loan forward a year. After 12 payments, the balance on the $378,000 loan is $374,446.74. Those 12 payments total $31,406.40, yet the balance moved by only a few thousand dollars. Most of that money went to the lender as interest, and you will see the same pattern in every year of the loan. In the final years, the split flips: most of each payment reduces the balance.

Two practical points follow from this:

1. Check the first-year split before you sign. Ask your lender for the principal and interest in the first payment, then run the formula yourself. If the numbers do not match, ask why.
2. Ask how extra payments are applied. Tell your servicer in writing that an extra amount goes to principal. Otherwise it may be held as a credit toward the next payment.

Principal and interest is not the whole payment

The $2,617.20 figure is only the principal-and-interest part. Your actual monthly bill in an escrow account also includes:

• Property taxes, which vary by county and can change every year.
• Homeowners insurance, which many lenders require you to pay through escrow.
• Mortgage insurance, if your down payment is under 20% on a conventional loan, or the FHA annual premium on an FHA loan.

Taxes and insurance can add a few hundred dollars a month, depending on where you live. When you compare two offers, compare the principal-and-interest payment first, then add the escrow items to both.

How to use the formula with other loans

The same formula works for any fixed-rate, fully amortizing loan. Change the loan amount, rate or term and repeat the four steps. A 15-year loan at the same rate has a much higher monthly payment, but total interest falls sharply because the balance drops faster. For a 15-year term, set n to 15 × 12 = 180 and leave everything else the same.

Lenders often quote a lower rate for a shorter term, so compare the two loans on the same basis: the monthly payment you can afford and the total interest you will pay. Run each option through the formula before you choose. A payment that looks cheap on a 30-year loan may leave you paying more in total than a shorter loan you can comfortably afford.

If you want a fast answer without the math, use the amortization schedule calculator above, or run the numbers in a spreadsheet to see the monthly split.

Sources

• Consumer Financial Protection Bureau, mortgage guides: https://www.consumerfinance.gov/consumer-tools/mortgages/
• Freddie Mac, Primary Mortgage Market Survey (PMMS): https://www.freddiemac.com/pmms