How a mortgage payment is calculated — and where your money goes

The annuity formula

Most mortgages use a fixed monthly payment (an annuity). The formula is M = P × r × (1 + r)^n / ((1 + r)^n − 1), where P is the loan amount, r the monthly interest rate (yearly rate / 12) and n the number of monthly payments.

Example: $300,000 over 30 years at 6% gives r = 0.005 and n = 360. The monthly payment is about $1,799. Over 30 years you pay roughly $647,500 in total — about $347,500 in interest.

Interest first, principal later

The payment stays the same, but its make-up changes. In month one of the example, interest is $300,000 × 0.005 = $1,500, so only $299 reduces the debt. As the balance falls, the interest part shrinks and the repayment part grows. In the final years nearly the whole payment goes to principal.

This is why selling or refinancing after a few years leaves most of the original debt still outstanding.

Term vs. total cost

The same $300,000 at 6% over 15 years costs about $2,532 a month, but total interest drops to roughly $155,700 — less than half. A longer term lowers the monthly burden at the price of much higher total cost.

What one percentage point does

At 5% instead of 6%, the 30-year payment on $300,000 falls to about $1,610 — saving around $189 a month and about $68,000 over the full term. Small rate differences matter a lot on large, long loans.

Costs the formula doesn't include

Real monthly housing costs often include property tax, insurance, mortgage insurance and service charges. Tax treatment of mortgage interest also differs by country. Use the calculator for the loan itself and add these costs separately; ask a mortgage adviser for a binding figure.