How to Calculate Your Mortgage Step by Step
The actual formula behind your monthly payment — and why two mortgages with the same interest rate can cost you $30,000 difference.
Buying a home is the biggest financial decision most people will ever make. Yet, many sign mortgages without truly understanding how the monthly payment is calculated. Let's break it down.
The amortization formula
Almost every mortgage uses a fixed-payment amortization formula:
Payment = P × (r × (1+r)^n) / ((1+r)^n − 1)
Where P is the principal borrowed, r is the monthly interest rate (annual rate / 12), and n is the total number of months.
A real example
If you borrow $200,000 at 4.5% over 25 years:
Yes — you pay more in interest than two thirds of the house.
APR vs interest rate
The nominal interest rate is just the cost of borrowing. APR also includes fees and required insurance. Two mortgages quoted at 3.5% can have APRs of 3.8% and 4.4%. Over 30 years that's $25k+ in differences.