How to Calculate Principal and Interest on a Mortgage Payment (2024)

How to calculate principal and interest | Interest vs. principal | Calculating mortgage payoff| FAQ

A monthly mortgage payment is made up of two components: principal and interest. The principal is the amount you borrow from a lender (and have to pay back). The interest is what the lender charges for borrowing money.

When you apply for a mortgage, your lender figures out the loan amount, interest rate, and loan term (typically 15–30 years). Then they use that information to calculate your monthly payment.

You can save money in the long term by paying down the principal loan. The less the amount of the principal loan, the less interest it will accrue over time.

You can learn how to calculate principal and interest amounts on mortgage payments. Principal and interest calculations can help you understand monthly payments, the total cost of a loan, and the interest rate. Then you can make a payoff plan that willsave you the most money in the long run.

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How to calculate principal and interest

Principal = purchase price - down payment
Monthly interest = (principal × interest rate) ÷ 12 months
Monthly principal = monthly mortgage payment - interest payment = monthly principal payment

How to calculate principal

To calculate the principal of your mortgage loan, you subtract your down payment from the purchase price.

For example, if you buy a $500,000 home and have a down payment of $80,000, your principal would be $420,000.

How to calculate total interest

Calculating total interest on your mortgage loan is complicated. We recommend using a calculator. You’ll need to input the principal loan amount ($420,000), the interest rate (7%), and the loan term (30 years).

So if the principal is $420,000 and the interest rate is 7% and the loan term is 30 years, the total interest would be $585,937.

How to calculate a monthly payment

To calculate principal and interest, first you’ll need your monthly mortgage amount. Take the purchase price of the home and the mortgage interest rate and plug them into an online calculator to calculate your monthly payment.

For a $500,000 home with a 7% mortgage interest rate, your monthly payment would be around $2,794.

That payment is split between principal and interest. As you pay down the principal balance, the interest your loan accrues will also go down.

How to calculate your monthly interest payment

To calculate your monthly interest payment, multiply the principal by the annual interest rate and then divide that total by 12 months.

For our example, the principal is $420,000 multiplied by the 7% interest rate is $29,400. Divide that by 12, and you get $2,450.

($420,000 x 0.07) / 12 = $2,450

That means of your $2,794 monthly payment, $2,450 will go to paying off the interest each month rather than the principal.

How to calculate your monthly principal payment

To calculate your monthly principal payment, subtract the monthly interest payment ($2,450) from your monthly mortgage payment ($2,794). What's left over ($344) is the amount going to your principal each month.

Monthly mortgage payment - interest payment = monthly principal payment

$2,794 - $2,450 = $344

However, you can choose to pay more of your principal loan every month if you want to lessen the amount of interest you accrue over time.

How to save on mortgage interest

To reduce the amount of mortgage interest you pay in the long run, you can pay more toward your principal each month.

For example, if you pay $100 extra toward the principal every month ($2,894 PI), you'll save $73,394 in long-term interest. Plus, you'll pay off your mortgage 10% faster and over three years sooner.

If you pay an extra $200 per month ($2,994 PI), you'll save $128,199 over time. And you'll pay the loan off 18% faster and 5.5 years sooner. An extra $300 per month will save you $171,140 in interest and shorten the loan by 7.5 years.

Potential principal payments for $420,000 example

Extra payments

None

$100/mo

$200/mo

$300/mo

Monthly PI payment

$2,794

$2,894

$2,994

$3,094

Total interest paid

$585,937

$512,543

$457,739

$414,797

Time until payoff

30 years

26 years

24 years

22 years

The more you can pay toward the principal over the life of your loan, the more you'll save in interest — and you'll own your home outright sooner, too!

But, paying more on monthly mortgage payments can reduce your financial flexibility. You won't have as much income to invest in retirement, pay off other debt, or use in an emergency. You also might not be able to save as much as you would like to.

Interest vs. principal: How mortgage payments work

Your mortgage payment consists of interest and principal payments.

You pay off your mortgage according to an amortization schedule, which lets you budget fixed mortgage payments over the life of the loan. Amortization refers to your shrinking balance as you make payments.

Amortization schedules maintain the same fixed payment amount throughout the loan term on fixed-rate mortgages.

Typically, the first half of the amortization schedule pays down interest first. But the principal amount grows larger than the interest payments during your amortization schedule's second half.

That’s how your payment breakdown equals interest payments higher than your principal payments over the first half of loan amortization.

What portion of your mortgage is principal?

The amount applied to the principal initially depends on whether it's a shorter-term (e.g., 15-year) or longer-term (e.g., 30-year) amortization schedule.

Mortgage payments on:

  • Long-term loans are attached to interest for the first half of the loan.
  • Short-term loans start with a nearly even principal and interest breakdown.

Short-term loans

With a short-term fixed-rate mortgage, principal quickly overtakes interest — sometimes, right away.

Compared with a 30-year mortgage, shorter-term loan payments are much higher — but usually with a lower interest rate. That means you'll pay less interest, allowing lenders to apply more money to the principal sooner.

Do additional payments go toward principal?

Don't assume your lender will automatically apply any extra payments to the outstanding principal loan amount. Ask your lender about the procedure and whether you need to stipulate that the extra amount is a principal-only payment.

Additional payments (anything greater than your monthly mortgage) may be applied to principal or interest. It depends on your loan agreement and your communication with the lender.

How do you calculate a mortgage payoff?

You'll need to know the mortgage payoff amount if you want to refinance or sell your home. Your lender will have the exact sum, which will be date-specific, but you can get an idea of what you'll owe.

  1. Multiply your principal balance (which you can find on your most recent mortgage statement) by the interest rate for the annual interest amount.
  2. Divide the annual interest by 365 to get the daily rate.
  3. Count the days from the statement date to your anticipated payoff date.
  4. Multiply the total number of days by the daily interest rate (from step 2) for the total interest due by that date.
  5. Add the total interest due to the outstanding principal balance.
  6. Add the prepayment penalty (if applicable) to the total amount.

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Other items included in a monthly mortgage payment

Your mortgage payment consists of principal and interest (PI). But you likely have other monthly expenses included in the payment.

Consider all these additional costs in your monthly budget when deciding whether you can afford extra payments to pay down your mortgage principal and how much to pay.

Property taxes and insurance

The most common additional payments are taxes and insurance (TI). Together, the payment is commonly called PITI.

Your lender will apply the principal and interest to your home loan and put the taxes and homeowner's insurance payments in an escrow account. Then, your lender pays the tax bill and annual insurance premium out of escrow when they come due each year.

Private mortgage insurance (PMI)

If you put down less than 20% for a conventional mortgage loan, you'll need to pay private mortgage insurance (PMI).

The lower down payment means that lenders are taking a higher risk by lending to you. PMI is a monthly insurance payment that protects the lender if you stop paying your loan.

You can avoid having to pay PMI by putting down a higher down payment. Remember, PMI will be an additional payment to your monthly mortgage. If what you can save is greater than your refinancing costs, it can be worth refinancing to get rid of PMI.

HOA fees

If you live in certain communities or subdivisions, you might have to pay Homeowners Association (HOA) fees. HOA fees are extra payments on top of your monthly mortgage payments. They cover general maintenance costs for shared spaces, like pools, lobbies,and clubhouses.

FAQs

The principal is the initial amount of money borrowed from a lender. You pay this money back in your monthly mortgage payment.

It’s usually better to pay principal. Paying down the principal faster saves money because the principal determines the interest. As the principal gets smaller, sodoes the interest.

If you take out a large loan, your interest will be higher than your principal. As you pay down the principal, your interest will also decrease.

Loan amortization is the method of paying off a fixed-rate mortgage loan in equal monthly payments. This helps budget a fixed payment over the course of your loan. You can use an amortizationcalculator to figure out your monthly payment schedule.

How to Calculate Principal and Interest on a Mortgage Payment (2024)

FAQs

How to calculate mortgage payment interest and principal? ›

Step 1: Convert your annual interest rate to a monthly rate by dividing by 12. Step 2: Multiply your loan amount by your monthly interest rate to get your monthly interest payment. Step 3:To calculate your monthly principal payment, subtract your monthly interest payment from your total monthly payment.

How to calculate interest rate from principal and payment? ›

To calculate interest rates, use the formula: Interest = Principal × Rate × Tenure. This equation helps determine the interest rate on investments or loans.

How much of a mortgage payment goes to principal? ›

After a year of mortgage payments, 31% of your money starts to go toward the principal. You see 45% going toward principal after ten years and 67% going toward principal after year 20.

What is the formula for principal payment? ›

The formula for calculating the monthly principal payment for your business is as follows: a / {[(1+r)^n]-1]} / [r(1+r)^n] = p. In this, "a" stands for the total loan amount, "r" for the periodic interest rate, "n" for the total number of payment periods, and "p" for the monthly payment.

What is the formula for calculating monthly mortgage payments? ›

For example, if your interest rate is 6 percent, you would divide 0.06 by 12 to get a monthly rate of 0.005. You would then multiply this number by the amount of your loan to calculate your loan payment. If your loan amount is $100,000, you would multiply $100,000 by 0.005 for a monthly payment of $500.

How do you calculate principal or interest? ›

How are the principal and interest on a loan computed? To calculate interest, multiply the principal amount, the rate of interest, and the time in years it will take to repay the loan. To find the principal, divide the amount of interest by the product of the interest rate and the time of the loan in years.

How do banks calculate principal and interest repayments? ›

Interest is calculated daily by your lender and added to your mortgage repayments. At the end of every business day, your lender multiplies your loan's interest rate by how much of your principal you have left to repay, then divides this amount by 365 days, or 366 if it's a leap year.

What is the formula for the monthly payment? ›

Monthly Payment = (P × r) ∕ n

Again, “P” represents your principal amount, and “r” is your APR. However, “n” in this equation is the number of payments you'll make over a year. Now for an example. Let's say you get an interest-only personal loan for $10,000 with an APR of 3.5% and a 60-month repayment term.

What is the formula for the principal of interest? ›

The formula is SI = P × R × T / 100, where SI is the simple interest, P is the principal, R is the interest rate, and T is the time in years. To find the principal in simple interest, rearrange the formula: P = SI × 100 / (R × T).

What happens if I pay an extra $200 a month on my mortgage principal? ›

If you pay $200 extra a month towards principal, you can cut your loan term by more than 8 years and reduce the interest paid by more than $44,000. Another way to pay down your mortgage in less time is to make half-monthly payments every 2 weeks, instead of 1 full monthly payment.

Why does so little of my mortgage payment Go to principal? ›

In the beginning, you owe more interest, because your loan balance is still high. So most of your monthly payment goes to pay the interest, and a little bit goes to paying off the principal. Over time, as you pay down the principal, you owe less interest each month, because your loan balance is lower.

How do I pay more principal than interest on my mortgage? ›

Ways to pay down your mortgage principal faster
  1. Make one extra payment every year. ...
  2. Make recurring principal-only payments. ...
  3. Split your monthly mortgage payment in half and pay that amount every two weeks. ...
  4. Round up your monthly payments to the next $100 and pay the difference. ...
  5. Use a combination of methods.

How do you calculate principal repayment on a home loan? ›

Hence, subtracting the total interest payable from the total loan amount will give you the principal amount you will repay over the loan's tenure. This calculation can help in optimising your home loan tenure, EMI amount, and down payment.

What is the formula for calculating interest rate from principal and payment? ›

Simple Interest Formulas and Calculations:
  1. Calculate Interest, solve for I. I = Prt.
  2. Calculate Principal Amount, solve for P. P = I / rt.
  3. Calculate rate of interest in decimal, solve for r. r = I / Pt.
  4. Calculate rate of interest in percent. R = r * 100.
  5. Calculate time, solve for t. t = I / Pr.
Mar 28, 2024

How to calculate monthly payment on a loan? ›

The formula is: M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1], where M is the monthly payment, P is the loan amount, i is the interest rate (divided by 12) and n is the number of monthly payments.

How to calculate principal and interest payment for a mortgage in Excel? ›

“=PMT” → The “PMT” function in Excel calculates the periodic payment on a loan, inclusive of both the interest and principal. “=IPMT” → In contrast, the “IPMT” in Excel calculates only the interest paid on a loan, as suggested by the “I” in front that stands for “interest.”

How is mortgage interest calculated on payment? ›

How to calculate your mortgage interest
  1. Step 1 - Take the current outstanding balance owed on your mortgage.
  2. Step 2 - Multiply that number by your current interest rate as a decimal.
  3. Step 3 - Divide that number by 12. This will give you the amount due in interest on your next mortgage repayment.

How to calculate monthly payment with interest rate? ›

The formula is: M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1], where M is the monthly payment, P is the loan amount, i is the interest rate (divided by 12) and n is the number of monthly payments.

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