How to Calculate Your Mortgage Payment (Step-by-Step)
Your monthly mortgage payment isn't just one number—it's made up of four components that lenders call PITI: Principal, Interest, Taxes, and Insurance. Understanding each piece helps you budget accurately and avoid surprises at closing.
The Basic Formula
Lenders calculate the principal and interest portion of your payment using this formula:
M = P × [r(1+r)^n] / [(1+r)^n - 1]
Where:
- M = Monthly payment (principal + interest only)
- P = Principal (loan amount)
- r = Monthly interest rate (annual rate ÷ 12)
- n = Total number of payments (loan term in years × 12)
This looks intimidating, but let's work through a real example.
Real Example: $350,000 Home Purchase
Say you're buying a $350,000 home with 20% down ($70,000). Your loan amount is $280,000. With a 6.5% interest rate on a 30-year mortgage:
- P = $280,000
- r = 0.065 ÷ 12 = 0.00542
- n = 30 × 12 = 360 payments
Plugging these in:
M = $280,000 × [0.00542(1.00542)^360] / [(1.00542)^360 - 1]
M = $280,000 × [0.00542 × 6.99] / [6.99 - 1]
M = $280,000 × 0.0379 / 5.99
M = $1,770 per month (principal and interest)
But that's not your full payment.
Adding Taxes and Insurance (The Full PITI)
Your actual monthly payment includes:
Property Taxes
Property taxes vary dramatically by location. The national average is about 1.1% of home value annually. For a $350,000 home:
$350,000 × 0.011 = $3,850 per year $321 per month
Some states run much higher—New Jersey averages 2.47%, which would be $720/month on this home. Texas averages 1.80%, or $525/month. Check your specific county's rate before budgeting.
Homeowners Insurance
Average homeowners insurance runs $1,500-$2,000 per year for a $350,000 home, depending on location, coverage, and deductible. Using $1,800:
$150 per month
Private Mortgage Insurance (PMI)
If your down payment is less than 20%, you'll pay PMI. Rates typically run 0.5% to 1% of the loan amount annually. With 10% down on our example ($315,000 loan) at 0.75%:
$315,000 × 0.0075 = $2,363 per year $197 per month
PMI drops off automatically once you reach 22% equity, or you can request removal at 20%.
Your Complete Monthly Payment
For our $350,000 home with 20% down at 6.5%:
| Component | Monthly Amount |
|---|---|
| Principal & Interest | $1,770 |
| Property Tax | $321 |
| Homeowners Insurance | $150 |
| PMI | $0 (20% down) |
| Total PITI | $2,241 |
With 10% down, add $197 for PMI: $2,438/month
What the Payment Actually Covers
Your payment splits differently over time. In the first years, most goes to interest. By year 20, most goes to principal.
On a $280,000 loan at 6.5%:
Year 1, Payment 1:
- Interest: $1,517
- Principal: $253
- Balance after payment: $279,747
Year 15, Payment 180:
- Interest: $1,023
- Principal: $747
- Balance: $184,634
Year 29, Payment 348:
- Interest: $187
- Principal: $1,583
- Balance: $32,412
This is why extra payments early in your loan save the most money—they reduce the principal that interest is calculated on.
How Extra Payments Affect Your Loan
Adding $200/month to the principal on our $280,000 loan at 6.5%:
- Original payoff: 30 years
- With extra $200: 24 years, 2 months
- Interest saved: $68,947
That $200/month investment returns over $68,000 in interest you don't pay.
The 28/36 Rule for Affordability
Lenders use two ratios to determine how much you can borrow:
Front-end ratio (28%): Your housing payment (PITI) should be ≤28% of gross monthly income.
Back-end ratio (36%): All monthly debt payments (housing + car + student loans + credit cards) should be ≤36% of gross monthly income.
Example: $8,000 gross monthly income
- Maximum housing payment: $8,000 × 0.28 = $2,240
- Maximum total debt: $8,000 × 0.36 = $2,880
If you have a $400 car payment and $200 in student loans, your maximum housing payment drops to $2,280 ($2,880 - $600).
Try the Calculation Yourself
Use our mortgage calculator to run your own numbers. Enter your home price, down payment, interest rate, and location—we'll calculate your full PITI payment including local property tax rates.
The formula doesn't change, but your inputs make a huge difference. A 1% rate difference on a $280,000 loan changes your payment by $166/month—nearly $60,000 over 30 years.