How your mortgage payment is calculated
The principal & interest (P&I) part of your payment comes from the amortization formula: the lender finds the one fixed monthly amount that, paid every month, retires the loan exactly at the end of the term. Each payment first covers that month's interest on the remaining balance; whatever is left chips away at the principal. Property taxes and homeowners insurance don't go to the lender at all. They're usually collected into escrow and stacked on top of P&I, which is why your real payment is bigger than the number in the rate ads.
The formula
M is the monthly principal & interest payment, P the loan amount (home price minus down payment), r the monthly interest rate (annual rate ÷ 12 ÷ 100), and n the number of monthly payments (years × 12). If the rate is 0%, the payment is simply P ÷ n.
Worked example
A $375,000 home with $75,000 down (20%) leaves a $300,000 loan. At 6.5% for 30 years: r = 0.065 ÷ 12 ≈ 0.005417 and n = 360, which gives a P&I payment of $1,896.20 per month.
Add $3,600/year property tax ($300/month) and $1,800/year insurance ($150/month), and the full monthly payment is $2,346.20. Over 30 years you'd pay roughly $382,600 in interest, more than the original loan itself.
Front-loaded interest and the 28% rule
In that example, the very first payment includes $1,625 of interest (0.5417% of $300,000) and only $271 of principal: about 86% of the check goes to interest. The split improves a little every month, but it takes most of a 30-year term before principal dominates. That's why extra payments made in the early years are so powerful: every extra dollar goes straight to the balance, killing decades of future interest on it.
For affordability, lenders lean on the 28% rule: your full housing payment (P&I plus taxes and insurance) should be at most 28% of your gross monthly income. The $2,346.20 payment above would call for roughly $8,380 of gross monthly income, about a $100,000 salary. Treat it as a ceiling, not a target; a payment well below it leaves room for everything else life invoices you for.
How much house can I afford on my salary?
The full version of that guideline is the 28/36 rule: housing (the complete PITI payment) at or under 28% of gross monthly income, and all monthly debt payments (housing plus car loans, student loans, and credit-card minimums) under 36%. Here's the 28% side turned into real numbers at a 7% rate over 30 years, assuming roughly 20% of the housing budget goes to property taxes and insurance (your county may charge more or less; the property tax calculator will tell you):
| Salary | Max housing payment (28%) | Supports a loan of about | Approximate price range |
|---|---|---|---|
| $60,000 | $1,400/mo | $168,000 | $168,000 to $210,000 |
| $80,000 | $1,867/mo | $224,000 | $224,000 to $281,000 |
| $100,000 | $2,333/mo | $281,000 | $281,000 to $351,000 |
| $120,000 | $2,800/mo | $337,000 | $337,000 to $421,000 |
The low end of each range is a zero-down purchase, where the price is the loan; that's realistic mainly for veterans using a VA loan. The high end assumes 20% down. If you're paid hourly, the hourly to salary calculator converts your wage to the annual figure first. And don't forget the 36% side: at 7% over 30 years, a $500/mo car payment (size any installment debt with the loan calculator) eats roughly $75,000 of the mortgage a lender would otherwise approve. The cheapest way to buy more house is often to show up without a car loan.
What a 1% rate change is really worth
Rates move the payment more than most buyers expect. The same $350,000 loan over 30 years:
| Rate | Monthly P&I | Lifetime interest |
|---|---|---|
| 5.5% | $1,987.26 | $365,414 |
| 6.5% | $2,212.24 | $446,406 |
| 7.5% | $2,447.25 | $531,010 |
Each percentage point on this loan is worth about $225 to $235 a month and over $80,000 of lifetime interest. That's the entire argument for getting three or four lender quotes instead of one: a quarter-point of haggling on a $350,000 loan buys a nicer vacation every year, forever. It's also why a future refinance can be worth real money, though refinancing has its own closing costs, so the drop needs to be big enough to earn them back.
15-year vs 30-year: the honest tradeoff
A $300,000 loan at 6.5%: the 30-year costs $1,896.20/mo and $382,633 in lifetime interest. The 15-year costs $2,613.32/mo and $170,398; an extra $717.12 a month erases about $212,000 of interest. In practice the gap is even wider, because 15-year rates usually run about half a point lower: at 6.0%, the 15-year payment is $2,531.57 and lifetime interest falls to $155,683.
So why does anyone take the 30-year? Flexibility. You can pay a 30-year loan on a 15-year schedule any month you like, but you can't pay a 15-year loan on a 30-year schedule the month your income drops or the roof fails. The 15-year's lower rate and forced discipline are the prize; the 30-year's escape hatch is cheap insurance. If the 15-year payment would leave you with no savings margin, take the 30 and prepay it.
What one extra payment a year does
Take that same $300,000 loan at 6.5% for 30 years and make one extra P&I payment ($1,896.20) toward principal each year. The loan is paid off in 24 years 4 months instead of 30, and lifetime interest drops from $382,633 to $298,649: about $84,000 saved and 5 years 8 months of payments that never happen.
Two mechanics matter. First, tell your servicer the extra money is to be applied to principal; otherwise some will treat it as prepaying next month's bill, which saves you nothing. Second, weigh it against the alternative: prepaying a 6.5% mortgage is a guaranteed, tax-free 6.5% return, which is excellent for a sure thing but not automatically better than investing the same cash. Run the same dollars through the compound interest calculator and compare. Fund the emergency fund and any employer 401(k) match first; those beat both.