Mortgage Calculator

If you've ever wondered how lenders arrive at your monthly payment amount, the answer involves some financial math that dates back centuries. Understanding the formula helps you see why certain factors matter more than others.

The Mortgage Payment Formula

Lenders use this formula to calculate your principal and interest payment:

Let's walk through a real example. Say you're borrowing $320,000 at 6.5% for 30 years:

• P = $320,000
• r = 0.065 ÷ 12 = 0.00542 (monthly rate)
• n = 30 × 12 = 360 payments

Plugging these numbers into the formula gives you a monthly principal and interest payment of $2,022. Add in property taxes ($500), insurance ($200), and any PMI or HOA fees to get your complete monthly payment.

Why Your First Payments Are Mostly Interest

Here's something that surprises many first-time buyers: in the early years of your mortgage, the vast majority of each payment goes toward interest, not principal. This is called amortization.

Using our $320,000 loan example, your first payment breaks down like this:

• Total payment: $2,022
• Interest: $1,733
• Principal: $289

Only $289 of that first $2,022 payment actually reduces your loan balance. The interest portion is calculated by multiplying your current loan balance ($320,000) by your monthly interest rate (0.00542), which equals $1,733.

But here's where it gets interesting. In month 2, you owe slightly less—$319,711 instead of $320,000. So your interest charge drops to $1,732, and $290 goes toward principal. Each month, the interest portion shrinks and the principal portion grows.

By year 15, your payments are roughly split 50/50 between interest and principal. By year 25, most of your payment goes toward principal. Your final payment might be $2,020 toward principal and just $2 in interest.

The True Cost of Your Mortgage

The total interest you'll pay over the life of your loan often shocks people. On that $320,000 loan at 6.5% over 30 years, you'll make 360 payments of $2,022, totaling $727,920. That means you're paying $407,920 in interest—more than the original loan amount.

This is why paying extra toward your principal can save you so much money. Every dollar you pay beyond your required payment goes straight to reducing your balance, which means less interest charged going forward.

For example, adding just $100 to your monthly payment on that $320,000 loan would:

• Save you $56,620 in interest
• Pay off your loan 4 years and 5 months early
• Cost you only $36,000 total in extra payments

Fixed vs. Adjustable Rate Mortgages

Most people choose fixed-rate mortgages because they're predictable—your rate and payment never change. But adjustable-rate mortgages (ARMs) work differently.

A 5/1 ARM, for example, starts with a fixed rate for 5 years, then adjusts annually based on market conditions. The initial rate is usually lower than a fixed-rate mortgage, which means lower payments at first. But after that fixed period ends, your rate—and payment—can go up or down.

ARMs make sense if you plan to sell or refinance before the adjustment period hits. They're riskier if you plan to stay long-term because you can't predict future rates. During the 2000s, many homeowners got caught when their ARM payments jumped by $500 or more per month.

How Points and Closing Costs Factor In

When you close on a mortgage, you'll pay various fees—typically 2% to 5% of the loan amount. These include appraisal fees, title insurance, attorney fees, and origination charges.

One important cost is "points." One point equals 1% of your loan amount. You can buy points to lower your interest rate—typically, one point reduces your rate by 0.25%. On a $300,000 loan, one point costs $3,000 and might drop your rate from 6.5% to 6.25%.

Is buying points worth it? It depends on how long you'll keep the loan. If the lower rate saves you $75 per month, you'd need to keep the loan for 40 months ($3,000 ÷ $75) to break even. If you refinance or move before then, you lose money.

After helping thousands of people understand their mortgage options, I've seen which strategies actually save money and which ones sound good but don't pan out. Here's what really works.

Make Biweekly Payments Instead of Monthly

This is one of the easiest ways to pay off your mortgage faster without feeling the pinch. Instead of making 12 monthly payments per year, you make 26 biweekly payments (every two weeks). Since there are 52 weeks in a year, you end up making 13 full payments instead of 12.

On a $300,000 loan at 6.5% over 30 years, this simple change will:

• Pay off your mortgage 4 years and 3 months early
• Save you $53,000 in interest
• Cost you nothing extra per year

The key is setting it up so the money comes out automatically every two weeks on payday. You won't miss it, and the savings add up fast. Just make sure your lender applies biweekly payments correctly—some hold the first payment and only apply it when the second arrives, which defeats the purpose.

Round Up Your Payment

If your mortgage payment is $1,847, pay $1,900 or even $2,000. That extra $50 to $150 goes entirely toward principal, saving you thousands in interest and years off your loan term.

Many people find this easier than biweekly payments. You make one payment per month like normal, just a bit more. On that same $300,000 loan, rounding up to $2,000 (adding $104 per month) saves you $48,000 in interest and pays off the loan 4 years early.

Recast Your Mortgage After a Windfall

Here's something most people don't know about. If you come into money—inheritance, bonus, stock options—you can make a large principal payment and ask your lender to "recast" your loan.

Recasting means the lender recalculates your monthly payment based on your new, lower balance while keeping your existing interest rate and loan term. The fee is usually $150 to $500, much cheaper than refinancing.

Example: You owe $320,000 on a 30-year loan at 6.5%. Your payment is $2,022. You inherit $50,000 and pay it toward principal. Your new balance is $270,000. After recasting, your new payment drops to $1,706—saving you $316 per month without refinancing.

Shop Lenders, Not Just Rates

Don't assume all lenders are the same at a given rate. One lender might charge 6.5% with $3,000 in fees. Another charges 6.5% with $8,000 in fees. A third offers 6.25% with $6,000 in fees. Which is better?

You need to compare the APR (Annual Percentage Rate), which factors in both the interest rate and fees. But even that doesn't tell the whole story. If you plan to refinance in 3 years, paying more in fees for a lower rate might not make sense. If you're keeping the loan for 10+ years, paying higher upfront fees for a better rate usually pays off.

Get quotes from at least three different types of lenders: a big bank, a credit union, and an online lender. They often have different appetites for lending and may offer you different deals based on your situation.

Time Your Closing Date

Here's a trick that can save you a few thousand dollars at closing. Mortgage interest is paid in arrears—meaning your November payment covers October's interest. When you close, you pay per-diem interest for each day left in that month.

If you close on the 5th, you owe 26 days of interest (assuming a 30-day month). If you close on the 28th, you owe just 3 days. On a $400,000 loan at 6.5%, that's the difference between $2,267 and $262 in prepaid interest at closing.

Your first payment won't be due until two months after closing, regardless of when you close. So closing at the end of the month gives you more time before your first payment and requires less cash at closing.

Challenge Your Property Tax Assessment

Property taxes often make up 30% to 40% of your monthly housing payment, yet most people never question their assessment. If your home is assessed at $450,000 but similar homes in your neighborhood sell for $400,000, you're overpaying on taxes.

Most counties have a formal appeals process. You gather recent comparable sales, fill out a form, and present your case. If successful, you could lower your assessment by 10% or more, saving hundreds per year. On a $450,000 assessment at a 1.5% tax rate, a 10% reduction saves you $675 per year.

Consider Skipping Escrow (If Allowed)

Most lenders require you to escrow your property taxes and insurance—they collect the money monthly and pay the bills when due. But if you put down 20% or more, some lenders let you opt out.

Why would you want to? Three reasons. First, you keep that money in your savings account earning interest until the bills are due. Second, you have more control and visibility over what you're actually paying. Third, you can time those large payments better for your cash flow.

The downside is you need discipline. If your annual property tax bill is $6,000, you need to set aside $500 per month so you're not caught short when the bill arrives. If you're not great at budgeting, stick with escrow.

Refinance When Rates Drop 0.75% or More

The old rule was to refinance when rates dropped 2%, but with today's lower closing costs, even a 0.75% drop can make sense. Run the numbers using a calculator. If you'll recoup your closing costs within 2 to 3 years and you plan to keep the house longer than that, refinancing probably makes sense.

Don't just focus on the rate, though. Consider your loan term. If you're 7 years into a 30-year mortgage and refinance into a new 30-year loan, you're extending your payoff date by 7 years. Consider refinancing into a 20-year or even 15-year loan to keep your payoff date the same or earlier.

Build an Offset Account Strategy

Some lenders offer mortgages with linked offset accounts. Your checking and savings balances offset your mortgage balance for interest calculation purposes, but you can still access your money anytime.

If you owe $300,000 and have $50,000 in your offset account, you only pay interest on $250,000. This works especially well if you have irregular income or keep a large emergency fund. You get the flexibility of liquid savings with the interest savings of paying down your mortgage.