Buying a home is the biggest purchase most people ever make — and the monthly mortgage payment is the number that decides whether that purchase is affordable. Let's break down exactly how that number is calculated.
Lenders use the standard amortisation formula:
M = P × r(1+r)n / ((1+r)n − 1)
Where M is your monthly payment, P is the loan amount, r is the monthly interest rate (annual rate ÷ 12), and n is the total number of payments (years × 12).
Borrow $300,000 at 6.5% annual interest over 30 years. The monthly rate is 0.065 ÷ 12 = 0.005417, and n = 360. Plug it in and the monthly payment comes to about $1,896 — covering principal and interest only (taxes and insurance are extra).
Three things move the needle: the loan amount, the interest rate, and the term. A 1% lower rate on that $300,000 loan saves roughly $200 every month — over $70,000 across 30 years. A 15-year term nearly doubles the monthly payment but slashes total interest dramatically.
Try our free Mortgage Calculator — enter any loan amount, rate and term to see your monthly payment plus the full principal-vs-interest breakdown.
Estimates for education only — not financial advice. Talk to a lender for real quotes.