Mortgage Calculator Guide: Formula, Examples & How to Save Thousands
Master the mortgage payment formula M = P[r(1+r)ⁿ]/[(1+r)ⁿ−1], understand amortization, and learn practical strategies to reduce total interest paid on your home loan.
The Mortgage Payment Formula
The standard mortgage formula is derived from the present value of an annuity — a fixed payment stream over a set number of periods. The three inputs are P (principal), r (monthly interest rate = APR ÷ 12), and n (total monthly payments = years × 12). For a 30-year loan at 7% APR: r = 0.07 ÷ 12 = 0.005833 and n = 360. Using exact APR — not a rounde
Step-by-Step Calculation Example
Example: $350,000 home, $70,000 down payment, 7% APR, 30-year term. Step 1 — Principal: $350,000 − $70,000 = $280,000 Step 2 — Monthly rate: 7% ÷ 12 = 0.005833 Step 3 — Payments: 30 × 12 = 360 Step 4 — Payment: $280,000 × [0.005833 × (1.005833)³⁶⁰] / [(1.005833)³⁶⁰ − 1] = $1,863/month Total paid over 30 years: $1,863 × 360 = $670,680. Total interes
Understanding Amortization
In the early years, the majority of each payment covers interest rather than principal — this is called amortization. In month 1 of the above example: Interest = $280,000 × 0.005833 = $1,633. Principal reduction = $1,863 − $1,633 = only $230. By year 15 the split shifts toward roughly equal principal and interest. By year 25, most of each payment g
Fixed vs. Adjustable Rate Mortgages
A fixed-rate mortgage (FRM) locks your interest rate for the full term. Monthly payments are predictable, but initial rates are typically higher than ARM introductory rates. An adjustable-rate mortgage (ARM) starts lower for a fixed period (e.g., 5 years on a 5/1 ARM), then adjusts annually based on a benchmark index plus a margin. ARMs make sense
Frequently Asked Questions
What is a good mortgage rate in the US right now?
In 2025, competitive 30-year fixed rates range from 6.5%–8% depending on credit score, down payment, and lender. Borrowers with 760+ credit scores and 20%+ down consistently qualify for the best rates. Check Freddie Mac's weekly Primary Mortgage Market Survey for current benchmar
How much house can I afford on a $100,000 salary?
The standard rule is to keep housing costs below 28% of gross monthly income. On $100,000/year that's $2,333/month. At 7% over 30 years, that supports a loan of roughly $352,000 — around $422,000 with a 20% down payment. Most lenders also cap total debt payments at 43% of gross i
Does paying extra principal lower future payments?
No — extra principal payments reduce your loan balance and shorten the payoff term, but your required monthly payment stays the same. However, every extra dollar in principal saves more than a dollar in future interest because it reduces the balance on which interest is calculate
What is the difference between interest rate and APR?
The interest rate is the cost of borrowing the principal. APR (Annual Percentage Rate) is higher — it includes the interest rate plus fees such as origination charges, discount points, and mortgage insurance. APR is the better comparison figure across lenders because it reflects
Can I pay off my mortgage early without penalty?
Most US mortgages since 2014 (under the Qualified Mortgage rule) have no prepayment penalty. Always confirm in your loan documents. If no penalty exists, extra principal payments or lump-sum payments can reduce total interest significantly and pay off your loan years early.