TL;DR
- Every lender uses the same formula — called the PMT formula — to calculate your monthly payment.
- A $400,000 loan at 7% for 30 years = $2,661/month in principal and interest.
- Early payments go mostly to interest. Later payments go mostly to principal. This is called amortization.
- Your interest rate has a bigger impact on your payment than your loan term.
- The PMT formula does not include taxes, insurance, or PMI — your real payment will be higher.
Your lender quotes you $2,661 a month. You nod and sign — but do you actually know where that number comes from?
Most people don't. And that's a problem. Because if you understand how your payment is calculated, you can catch errors, compare offers, and make smarter decisions with hundreds of thousands of dollars on the line.
This guide breaks it all down: the exact formula lenders use, a step-by-step example, and what that number doesn't tell you.
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Calculate My Payment in 30 Seconds →The PMT Formula: How Lenders Calculate Your Payment
PMT (short for "payment") is the formula every lender, bank, and mortgage app uses. It takes three inputs — your loan amount, your interest rate, and your loan term — and spits out one fixed monthly payment.
Formula
M = P × [r(1 + r)ⁿ] ÷ [(1 + r)ⁿ − 1]
Where: M = monthly payment P = principal (the amount you borrow) r = monthly interest rate (annual rate ÷ 12) n = total number of payments (years × 12)
In plain English: your payment equals the loan amount multiplied by a factor that accounts for your rate and how long you're borrowing.
This is the same formula as Excel's PMT() function. It's the same formula in every financial calculator. Once you know it, you can verify any quote in under a minute.
Step-by-Step Example: $400,000 at 7% for 30 Years
Let's run through a real calculation.
Formula
Loan: $400,000 | Rate: 7% | Term: 30 years
Step 1 — Monthly rate r = 7% ÷ 12 = 0.005833
Step 2 — Total payments n = 30 × 12 = 360 payments
Step 3 — Apply the PMT formula (1.005833)³⁶⁰ ≈ 8.1164
M = 400,000 × [0.005833 × 8.1164] ÷ [8.1164 − 1] M = 400,000 × 0.04734 ÷ 7.1164 M = 400,000 × 0.006653
➜ M ≈ $2,661/month
Result: $2,661/month — principal and interest only.
How Your Interest Rate Affects the Payment
Your rate is the single biggest lever in the formula. A 2% rate difference can add or remove hundreds of dollars per month — and tens of thousands over the life of the loan.
Monthly payments on a 30-year fixed mortgage:
| Rate | $200,000 loan | $400,000 loan | $600,000 loan |
|---|---|---|---|
| 5.0% | $1,074 | $2,147 | $3,221 |
| 6.0% | $1,199 | $2,398 | $3,597 |
| 7.0% | $1,331 | $2,661 | $3,992 |
| 8.0% | $1,468 | $2,935 | $4,403 |
Going from 5% to 7% on a $400,000 loan adds $514/month. That's $6,168 per year — and $185,040 over 30 years.
How Loan Term Affects the Payment
A shorter term means higher monthly payments, but you pay far less interest overall.
30-year vs. 15-year at 7%:
| Loan Amount | 30-Year | 15-Year | Monthly Difference |
|---|---|---|---|
| $200,000 | $1,331 | $1,797 | +$466/mo |
| $300,000 | $1,996 | $2,696 | +$700/mo |
| $400,000 | $2,661 | $3,595 | +$934/mo |
| $500,000 | $3,327 | $4,494 | +$1,167/mo |
With the $400,000 loan at 7%:
- 30-year total interest: $557,960
- 15-year total interest: $247,110
- Interest saved: $310,850 — in exchange for $934 more per month
In practice, 15-year mortgages also carry lower rates (often 0.5–0.75% below 30-year rates), which makes the savings even larger.
Understanding Amortization: How Each Payment Splits
Your monthly payment stays the same for the full loan term. But what it pays for changes every single month.
Amortization — the process of paying off a loan through regular payments — means that early payments are mostly interest, and later payments are mostly principal.
Here's why: interest is charged on your remaining balance. At the start, that balance is at its maximum, so the interest charge is high. As you pay down the loan, the balance drops — and so does the interest portion.
For a $400,000 loan at 7% (30 years):
| Month | Payment | Interest | Principal | Remaining Balance |
|---|---|---|---|---|
| 1 | $2,661 | $2,333 | $328 | $399,672 |
| 12 | $2,661 | $2,313 | $348 | $396,521 |
| 60 | $2,661 | $2,238 | $423 | $383,408 |
| 120 | $2,661 | $2,094 | $567 | $358,810 |
| 180 | $2,661 | $1,895 | $766 | $323,893 |
| 240 | $2,661 | $1,619 | $1,042 | $276,617 |
| 300 | $2,661 | $1,247 | $1,414 | $212,660 |
| 360 | $2,661 | $15 | $2,646 | $0 |
Month 1: you pay $2,333 in interest and only $328 toward your actual balance. By month 240 (year 20), that flips — $1,042 to principal, $1,619 to interest. By the last payment, almost everything is principal.
This is why extra payments early in the loan have such a big impact. You're cutting future interest charges on every dollar you pay down early.
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See Your Full Amortization Schedule →Warning: Don't Confuse Your Interest Rate With APR
These two numbers look similar on a loan estimate. They are not the same thing.
- Interest rate — the rate the PMT formula uses to calculate your monthly payment
- APR (Annual Percentage Rate) — the interest rate plus origination fees, points, and other costs, expressed as a yearly rate
APR is always higher than the interest rate (unless you paid zero closing costs). If you plug the APR into the PMT formula instead of the interest rate, your calculated payment will be wrong.
Use the interest rate to calculate payments. Use the APR to compare the true cost of different loan offers.
What the Formula Doesn't Include
The PMT formula gives you principal and interest (P&I) only. Your actual monthly payment to the lender will typically be higher and include:
Property Taxes (T) Lenders collect property taxes monthly through an escrow account. Your annual tax bill ÷ 12 gets added to your payment. Example: $6,000/year in taxes = +$500/month
Homeowners Insurance (I) All lenders require it. Typically $100–$250/month depending on your location and coverage level.
Private Mortgage Insurance (PMI) Required when your down payment is less than 20%. PMI usually costs 0.5%–1.5% of the loan per year and disappears once you reach 20% equity. Example: 1% PMI on $400,000 = +$333/month
HOA Fees If you're buying in a managed community, HOA fees are separate from your mortgage and paid directly to the association.
Your real monthly number (PITI):
Formula
$2,661 Principal & Interest (P&I)
- $500 Property taxes
- $150 Homeowners insurance
- $267 PMI (< 20% down) ───────────────────────────────────── = $3,578/month total payment
Lenders use this PITI total — not the P&I alone — when they check if you qualify based on your income.
3 Ways to Cut What You Pay Over Time
1. Make extra principal payments early An extra $500 in month 1 saves far more than the same $500 in month 300. Early payments eliminate interest charges on that balance for the remaining term. Pay extra as early as possible.
2. Switch to bi-weekly payments Bi-weekly payments mean 26 half-payments per year — which equals 13 full monthly payments instead of 12. That one extra payment per year goes entirely to principal. It can shorten a 30-year loan by 4–5 years and save tens of thousands in interest.
3. Run the refinance break-even math before you commit Refinancing has closing costs (typically 2%–5% of the loan). Calculate: closing costs ÷ monthly savings = months to break even. If you plan to sell or move before that date, refinancing costs more than it saves.
The Rule of 72: A Quick Mental Check
Formula
Rule of 72 — How Long Until Interest Costs Equal Your Loan?
72 ÷ your interest rate = years for interest costs to match your original principal
At 7%: 72 ÷ 7 ≈ 10 years At 5%: 72 ÷ 5 ≈ 14 years At 8%: 72 ÷ 8 = 9 years
This isn't exact, but it gives you a fast mental model for why rate differences matter so much on a 30-year loan. At 7%, interest costs alone will equal your original loan amount in about 10 years.
How to Use This Formula to Make Better Decisions
1. Verify lender quotes Run the PMT formula yourself before trusting any quote. Lenders rarely make errors — but knowing the math helps you ask the right questions about what's included.
2. Compare adjustable vs. fixed rates ARMs (adjustable-rate mortgages) offer lower initial rates, but the rate can rise. Calculate what your payment would be at the rate cap to understand your worst-case scenario.
3. Evaluate builder payment buydown offers Some builders offer to reduce your rate by 1–2% for the first year or two. Calculate the actual dollar value of that subsidy and compare it to a straight price reduction on the home.
4. Choose between loan amounts Instead of asking "can we afford X?", ask "what is the exact monthly payment for X, Y, and Z?" — then choose based on your real cash flow.
5. Model extra payments The amortization table shows how much of each dollar goes to interest at any point. Extra payments early in the loan cut far more than the same payments made later.
FAQ
What's the difference between the note rate and APR on my mortgage?
The note rate (or interest rate) is what the PMT formula uses to calculate your monthly payment. The APR includes the note rate plus fees like origination points and closing costs, expressed as a yearly rate. APR is almost always higher. Use the note rate to calculate payments; use APR to compare the true total cost of different loan offers side by side.
Why does my amortization schedule show so much interest early on?
Because interest is charged on your remaining balance. At the start of your loan, that balance is at its maximum — so the monthly interest charge is as high as it will ever be. As you pay down principal over time, the balance drops, and so does the monthly interest charge. This is why the first decade of a 30-year mortgage barely dents the principal.
Can I use the same formula for a 15-year loan?
Yes — identical formula. Change n from 360 to 180 (15 × 12). The monthly rate stays the same, but with fewer payments, each payment must be larger to fully pay off the loan. The result is a higher monthly payment and significantly less total interest paid.
What happens if I make bi-weekly payments instead of monthly?
Bi-weekly payments result in 26 half-payments per year — the equivalent of 13 full monthly payments instead of 12. That extra annual payment goes entirely to principal. On a 30-year loan, this typically cuts 4–5 years off the term and saves tens of thousands in interest.
Does the PMT formula work for adjustable-rate mortgages (ARMs)?
Yes, but only for the fixed period. A 5/1 ARM has a fixed rate for the first 5 years, calculated using the standard PMT formula. After that, the rate adjusts annually based on a market index plus a margin. At each adjustment, a new PMT calculation runs using the current rate and remaining balance and term. This is why ARMs have payment caps — to limit how much the payment can jump at each adjustment.
What credit score do I need to get rates like the ones in these examples?
The best mortgage rates go to borrowers with credit scores of 760 or higher, a debt-to-income ratio below 36%, and a down payment of 20% or more. A 700 score typically adds 0.25%–0.5% to your rate. A 650 score can add 1%–2%, which on a $400,000 loan means $270–$530 more per month.
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Try the Mortgage Calculator →Methodology & Sources
The mortgage payment calculations in this guide use the standard PMT formula as defined by the Consumer Financial Protection Bureau (CFPB) and consistent with how Freddie Mac and Fannie Mae calculate qualifying payments for conventional loans.
Interest rate data used in comparison tables reflects prevailing 30-year fixed mortgage rates as reported by the Federal Reserve's Primary Mortgage Market Survey (PMMS). Actual rates vary by lender, credit profile, down payment, and loan type.
Published: April 27, 2026 | Last updated: April 27, 2026 | By: FiscalCalc Editorial Team
All calculations are for educational purposes only. Mortgage rates, terms, and qualifying criteria vary by lender, credit profile, and market conditions. Consult a licensed mortgage professional or financial advisor before making any borrowing decisions.