The short version
Your monthly mortgage payment has two layers. The loan layer — principal and interest — comes from the amortization formula, which converts the loan amount, rate, and term into one fixed payment. The housing layer — property tax, homeowners insurance, PMI, and HOA — gets stacked on top, usually collected through escrow. On a typical $425,000 purchase the loan layer is about $2,149 and the housing layer adds another $504.
The amortization formula
Lenders don’t guess the payment — they solve for the fixed monthly amount that pays the loan off exactly, with interest, over the term:
M = P × r(1+r)n ÷ ((1+r)n − 1)
M is the monthly principal-and-interest payment, P is the loan amount (price minus down payment), r is the monthly interest rate (APR ÷ 12), and n is the number of payments (years × 12). The formula is just algebra: it finds the payment whose present value, discounted at the loan’s rate, equals the amount borrowed. Run your own numbers in the mortgage calculator.
Worked example: the $425,000 house at 6.5%
Price $425,000, down payment $85,000 (20%), so P = $340,000. Rate 6.5% APR for 30 years: r = 0.065 ÷ 12 = 0.0054167, n = 360.
Step 1 — the growth factor. (1+r)n = 1.0054167360 ≈ 6.983. This is how much $1 borrowed today would grow to if you paid nothing for 30 years.
Step 2 — the payment. M = 340,000 × 0.0054167 × 6.983 ÷ (6.983 − 1) = $2,149.03 per month of principal and interest.
Step 3 — the housing layer. Property tax $4,250 ÷ 12 = $354.17; insurance $1,800 ÷ 12 = $150.00; PMI is $0 (20% down); HOA $0. Total monthly payment: $2,653.20.
Step 4 — the lifetime cost. 360 payments × $2,149.03 = $773,651.26, minus the $340,000 borrowed = $433,651.26 in total interest — more than the loan itself. That number is why the term matters as much as the rate.
Why the first payments are almost all interest
Each month, the lender takes its interest first: balance × monthly rate. Whatever is left over reduces the balance. In month one of the example: $340,000 × 0.0054167 = $1,841.67 of interest, leaving only $307.36 for principal. The balance barely moves — so month two’s interest is nearly as large. This is amortization: early payments are interest-heavy by construction, and the principal share grows only as the balance shrinks. By the final year, the split has flipped almost entirely to principal.
That shape is also why extra principal payments are so powerful early on. An extra $200 a month on the example loan pays it off in 284 months instead of 360 — about six years early — and saves roughly $107,000 in interest, because every extra dollar kills the interest it would have earned for the rest of the loan. The extra loan payment calculator models this precisely.
PITI, PMI, and escrow — the rest of the check
PITI is principal, interest, property tax, and homeowners insurance — the four parts lenders bundle. Tax and insurance are usually collected monthly into an escrow account and paid on your behalf; the lender re-analyzes escrow yearly, so that slice of your payment moves even when the loan itself doesn’t.
PMI (private mortgage insurance) applies when the down payment is under 20% — typically 0.3–1% of the loan per year. Three exits: request cancellation at 20% equity, automatic termination at 78% loan-to-value under federal law, or a new appraisal proving 20% equity (appreciation counts, and it can end PMI years early).
Finally, the 28% rule: lenders like PITI at or under 28% of gross monthly income. The example’s $2,653.20 payment fits at about $9,476/month ($113,700/year) of income. The full affordability method — including the 36% back-end rule — is in how much house you can afford.
Frequently asked questions
How do I calculate my mortgage payment by hand?
Use M = P × r(1+r)n ÷ ((1+r)n − 1), with r = APR ÷ 12 and n = years × 12. On $340,000 at 6.5% for 360 months: r = 0.0054167, (1+r)n ≈ 6.983, so M = $2,149.03. Then add monthly tax, insurance, PMI, and HOA for the full payment — the mortgage calculator does all of it with a yearly schedule.
What is PITI in a mortgage payment?
Principal, Interest, property Tax, and homeowners Insurance. It’s the standard definition of a mortgage payment — the number lenders use for the 28% affordability rule. PMI and HOA dues are real monthly costs too, but they sit outside the PITI acronym.
How much of my first mortgage payments goes to principal?
Very little. On the $340,000 / 6.5% example, month one’s $2,149.03 splits into $1,841.67 interest and $307.36 principal — about 86% interest. The principal share grows every month as the balance falls; that’s the whole logic of amortization.
15-year vs 30-year mortgage — how big is the difference?
On $340,000 at 6%: the 15-year payment is $2,869.11 with $176,440 total interest; the 30-year is $2,038.47 with $393,850 total interest. The 15-year costs about $217,000 less in interest for a payment roughly 40% higher. Compare terms directly in the mortgage calculator.
When does PMI drop off?
You can request cancellation at 20% equity, the lender must automatically remove it at 78% loan-to-value, and a new appraisal showing 20% equity (counting appreciation) can end it early. Track your balance against those lines in the calculator’s payoff schedule.
What income do I need for a given mortgage payment?
Divide the PITI payment by 0.28. A $2,653.20 payment needs about $9,476/month ($113,700/year) to sit at the 28% guideline. That’s gross income, before taxes — and it’s a ceiling for housing alone, not total debt. See how much house you can afford for the complete picture.
Keep going
Bright Side Kit. "How Mortgage Payments Are Calculated." https://brightoolbox.com/guides/how-mortgage-payments-are-calculated/ Accessed October 21, 2026.