How your mortgage payment is calculated
A fixed-rate mortgage is repaid in equal monthly payments. Each payment first covers the interest owed for that month, and the rest reduces the balance. Early on most of the payment is interest; by the final years most of it is principal. The payment that pays a loan off exactly over its term is:
M = P × r ÷ (1 − (1 + r)−n)
where P is the amount borrowed (price minus down payment), r is the yearly rate divided by 12, and n is the number of monthly payments. A $320,000 loan at 6.5% for 30 years has r = 0.065 ÷ 12 and n = 360, which gives $2,022.62 a month before taxes and insurance.
What else goes into the monthly payment
Most lenders collect property tax and homeowners insurance with each payment and pay those bills for you from an escrow account, so the amount you actually send is higher than principal and interest alone. If you put down less than 20% on a conventional loan, the lender usually also charges private mortgage insurance (PMI), often 0.3% to 1.5% of the loan a year. By law it must stop automatically once the balance is scheduled to reach 78% of the home's original value, and you can ask for it to be removed at 80%.
Paying extra
Every extra dollar toward principal is a dollar that stops collecting interest for the rest of the loan. That is why even small extra payments early on can take years off a mortgage. You can add a fixed extra amount to every payment, or choose “Pay extra” on any single month in the schedule — for a bonus or a tax refund — and the calculator shows the interest saved and how much sooner the loan is paid off. Check first that your loan has no prepayment penalty.
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