Guide · Updated November 2026 · How we check our numbers
How Mortgage Payments Work (With a Worked Example)
A fixed-rate mortgage has the same principal-and-interest payment every month, but what that payment pays for changes over time.
The payment formula
Monthly payment = P × i × (1 + i)n ÷ ((1 + i)n − 1), where P is the loan amount, i is the yearly rate ÷ 12 and n is the number of months.
Example: a $300,000 loan at 6.5% for 30 years (360 months) has a payment of $1,896.20 a month.
Why early payments are mostly interest
Each month, interest is charged on the remaining balance. In month one, interest is $300,000 × 0.065 ÷ 12 = $1,625, so only about $271 of the first payment reduces the loan. As the balance falls, the interest part shrinks and more goes to principal.
PITI: the full monthly cost
Lenders talk about PITI: principal, interest, property taxes and homeowners insurance. Many loans with less than 20% down also add mortgage insurance (PMI), and some homes have HOA fees. A budget should include all of them, not just principal and interest.
How much house can you afford?
A common guideline keeps housing costs near 28% of gross monthly income and all debts near 36%. On a $100,000 income, that is about $2,333 a month for housing.
Extra payments
Extra money paid toward principal cuts future interest. On a $250,000 balance at 6.5% with 25 years left, adding $200 a month pays the loan off about 5.5 years sooner and saves roughly $65,000 of interest. Ask your lender to apply extra payments to principal only.
Try the calculators
This guide is general information, not professional advice.