The formula lenders actually use
Every fixed-rate mortgage payment comes from the same formula, sometimes called the amortization formula. It looks intimidating at first, but each piece has a simple job:
M = P × [ r(1+r)n ] / [ (1+r)n − 1 ]
- M your monthly payment
- P the principal (the amount you're borrowing)
- r your monthly interest rate (annual rate ÷ 12)
- n the total number of payments (years × 12)
The reason it's not just "interest × principal" is that every payment has to do two jobs at once: cover that month's interest charge, and chip away at the principal, in a way that lands on exactly $0 owed after your very last payment.
Worked example: $300,000 at 6% for 30 years
First, convert the annual numbers into monthly ones:
r = 0.06 ÷ 12 = 0.005
n = 30 × 12 = 360 payments
Next, calculate (1 + r)n:
(1.005)360 ≈ 6.022575
Now plug everything into the formula:
M = 300,000 × [ 0.005 × 6.022575 ] / [ 6.022575 − 1 ]
M = 300,000 × 0.03011288 / 5.022575
M ≈ $1,798.65 per month
That $1,798.65 covers principal and interest only it doesn't include property taxes, homeowners insurance, or PMI, which many lenders roll into your monthly bill separately.
Where that first payment actually goes
Early in a mortgage, most of each payment is interest, not principal that's the part that surprises a lot of first-time buyers. On month one of this loan:
Interest portion = $300,000 × 0.005 = $1,500.00
Principal portion = $1,798.65 − $1,500.00 = $298.65
Only about 17% of that first payment actually reduces the loan balance. As the balance shrinks over the years, the interest portion shrinks with it and more of each payment goes to principal that shifting split is what "amortization" means.
Total interest over the life of the loan
Multiply the monthly payment by the number of payments to see the full picture:
Total paid = $1,798.65 × 360 = $647,514.57
Total interest = $647,514.57 − $300,000 = $347,514.57
On this loan, you'd pay more in interest alone than the original amount borrowed.
What a shorter term changes
Running the same $300,000 at 6% through a 15-year term instead of 30 changes both numbers substantially:
Monthly payment: $2,531.57 (about 41% higher)
Total interest paid: $155,682.69 (less than half of the 30-year total)
A shorter term means a bigger monthly bite, but dramatically less interest paid overall, since the lender has far less time to charge interest on the outstanding balance.
Mortgage Calculator → plug in your own loan amount, rate, and term to see your real monthly payment instantly.