How to Calculate Principal and Interest on a Mortgage Payment

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

A monthly mortgage payment has two core components: principal and interest (PI). The principal is the amount you borrow from the lender, and the interest is the cost of borrowing that money. Together, these two make up your basic mortgage payment.

However, most homeowners also pay additional costs — like property taxes, homeowners insurance, and possibly PMI — bundled into what’s called PITI (principal, interest, taxes, and insurance). Understanding the P&I portion is key because it directly impacts how quickly you build equity and how much interest you’ll pay over the life of the loan.

How to calculate principal and interest

How to calculate principal and interest

To calculate principal and interest, you’ll need three numbers from your loan:

• Loan amount (purchase price – down payment)

• Interest rate

• Loan term (15 or 30 years)

Principal formula:

Purchase price – down payment = loan principal

Monthly interest formula:

Loan principal × (annual interest rate ÷ 12) = monthly interest

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 this example, if you bought 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 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.

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

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 loan follows an amortization schedule, which keeps your total payment fixed but changes how much goes to interest vs. principal each month.

• Early years: Most of your payment covers interest.

• Later years: Principal makes up the larger share.

Example: In year one of a $420K loan at 7%, only about 12% of your payment goes to principal. By year 20, more than half does.

This shift explains why making extra payments early in the loan has an outsized effect — you cut interest before it has years to compound.

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 vs. long-term loans

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

• 30-year loans: Lower monthly payments but interest dominates for much of the loan term.

• 15-year loans: Higher monthly payments but usually a lower interest rate. You build equity faster and pay significantly less interest overall.

Equity and payoff

Each principal payment also increases your home equity — the portion of the property you truly own. Accelerating principal payoff doesn’t just save interest; it helps you build wealth faster and can improve your financial flexibility when refinancing or selling.

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.

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.

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