How Mortgage Calculations Really Work

The formula behind every mortgage payment

Every fixed-rate mortgage payment you see in a calculator comes from one equation, the amortization formula: **M = P · r(1+r)^n / ((1+r)^n − 1)**. P is the loan amount, r is the monthly interest rate (annual ÷ 12), and n is the total number of monthly payments.

Why the first years feel unfair

In month one, almost the entire payment goes to interest because the balance is still huge. As the balance drops, more of the flat payment attacks principal. On a 30-year loan at 6.5%, you don't cross the "half principal, half interest" line until year 20.

A worked example

Take a $320,000 loan at 6.5% over 30 years. Monthly rate is 0.5417%; there are 360 payments. Plug it in and the payment is about $2,023. Multiply by 360 and you'll pay $728,000 — meaning $408,000 of pure interest over the life of the loan.

What taxes and insurance do

Lenders escrow property tax and homeowner's insurance so nothing slips. A $3,600 tax bill and $1,200 insurance premium add another $400 per month. This is the "PITI" number a Morecalcs mortgage calculation always shows.

Extra payments beat refinancing

Adding just $150 a month to the same loan cuts about six years off the term and saves roughly $85,000 in interest. Refinancing helps too, but only if the new rate beats the old one by enough to overcome closing costs within your expected stay.

What to try next

Open the mortgage calculator, set your own numbers, then increase the monthly payment by $100 and watch the interest column collapse. Numbers make the case that arguments never can.