Mortgage Calculator: How to Calculate Your Monthly Payment

For most households a mortgage is the largest financial contract they will ever sign. The difference between a good and a bad mortgage — even half a percentage point — easily adds up to a year's salary over the life of the loan. This guide breaks down exactly what goes into the monthly payment and how to lower it.

PITI: the four parts of every mortgage payment

Lenders combine four costs into one bill, abbreviated PITI:

• P — Principal — repayment of the amount you borrowed.
• I — Interest — the lender's profit, calculated on outstanding balance.
• T — Taxes — property tax, often collected by the lender and paid on your behalf via escrow.
• I — Insurance — homeowners insurance, plus PMI (Private Mortgage Insurance) if your down payment was below 20%.

The principal-and-interest piece is the part you can calculate yourself; taxes and insurance vary by location and property.

The mortgage formula

M = P × [r(1+r)^n] ÷ [(1+r)^n − 1]

Where:

• M = monthly P+I payment
• P = principal (loan amount)
• r = monthly interest rate (annual rate ÷ 12)
• n = number of monthly payments (years × 12)

A worked example

Borrow $300,000 at 6.5% APR for 30 years.

• r = 0.065 / 12 = 0.005417
• n = 360

M ≈ $1,896/month in principal & interest. Add ~$300 property tax and ~$120 insurance → ~$2,316/month total. Over 30 years, the same $300k loan costs $683k in total payments.

How much house can you actually afford?

Two rules of thumb most lenders use:

• 28% rule — housing costs (PITI) below 28% of gross monthly income.
• 36% rule (DTI) — *all* debt payments below 36% of gross monthly income.

If you earn $7,000/month gross, target a PITI under $1,960. Anything higher and one bad month — car repair, job change, sick kid — becomes a crisis.

Fixed vs adjustable rates

Fixed-rate (FRM) — your rate is locked for the entire term. Predictable, slightly more expensive at origination, perfect for buy-and-hold.

Adjustable-rate (ARM) — fixed for an initial period (5, 7, 10 years), then resets to a market index plus a margin. Usually 0.5–1% cheaper at start, but exposes you to rate hikes.

A 5/1 ARM made sense in 2021's 3% world. In 2026, with rates already near long-term averages, the calculus is different — get a quote both ways.

6 ways to lower your mortgage rate

1. Raise your credit score above 760 — most lenders give the best rate at that threshold. 2. Bigger down payment — 20% kills PMI; 25%+ sometimes wins a rate discount. 3. Shorter term — a 15-year loan is typically 0.5–0.75% cheaper than a 30. 4. Buy points — pay 1% of the loan upfront for ~0.25% off the rate; break-even usually 4–6 years. 5. Shop 5+ lenders. Rates vary by 0.5%+ between lenders on the same day. 6. Get rate-locked when you see a number you like. Rates move daily.

How much down payment do you really need?

• US — Conventional 3% minimum, FHA 3.5%, VA 0%. Below 20% triggers PMI.
• UK — 5–10% standard, government schemes for first-time buyers.
• Canada — 5% minimum below $500k home; 10% on the slice above.
• Australia — 20% deposit standard; LMI required below.
• Germany — 20–30% deposit typical; lower in some federal schemes.

Refinancing math

Refinance breaks even when (monthly savings) × months held > closing costs. If new rate saves you $200/month and closing costs are $4,000, you break even in 20 months. Don't refinance if you plan to move sooner.

Frequently asked questions

Should I pay extra principal each month? Yes, if you have no higher-interest debt. Even one extra payment a year on a 30-year loan can shave 4 years off.

Is interest tax-deductible? In the US, mortgage interest on the first $750k is deductible if you itemize. Most countries no longer allow this.

Should I overpay or invest the difference? If your mortgage rate exceeds your expected investment return, overpay. Otherwise, invest.

Use our Loan EMI Calculator to model your mortgage in any currency and country.