How to Calculate Principal and Interest – What Are the Key Tools I Need to Understand?

When you’re preparing to buy a home, it’s common to wonder about the costs involved. How is a mortgage payment calculated? How much interest will I pay on my mortgage? How much will the loan cost me overall?

If these questions are on your mind, you’ve come to the right place.

First: Why calculate principal and interest?

Principal and interest, sometimes shortened to P&I, are the two main elements of a mortgage payment. Principal refers to the loan balance, and interest is what a lender charges you to borrow money. Together, they constitute your loan repayment.

You’ve likely heard the importance of shopping around for a mortgage. Comparing rates is a place to start, but a detailed look at your potential payments can give you a more complete picture. You’ll be able to see how different rates, down payment amounts, and loan terms can affect both your monthly payment and what you pay over the life of the loan. That makes you a much more informed borrower.

Tools to use: amortization calculator and schedule

Start simple by getting a rate quote. Then, you can get a snapshot of the life of your potential loan with an online amortization calculator. (Amortization simply means the process of paying off debt with a known repayment term in regular installments over time.) This tool automatically runs the numbers for you and produces a schedule, or table, listing the details of every payment in the loan. Different calculators produce data in different formats, but generally you’ll find:

• Month and/or Year – The count of mortgage payments expressed in months or years
• Payment – Your monthly P&I payment, which remains consistent unless you have an adjustable rate mortgage
• Interest – How much of your P&I payment is allocated toward interest
• Principal – How much of your P&I payment is allocated toward the principal
• Remaining Balance – The current principal, or how much is left on the loan
• Total Payments – How much you’ll pay in total over the life of the loan
• Total Interest – How much you’ll pay in interest over the life of the loan

See it in action: Say you want to buy a $350,000 home and have a 20 percent down payment ($70,000). Your lender quotes you a 30-year fixed rate mortgage with an interest rate of 5.5 percent.

Here’s a condensed version of an annual amortization schedule for this scenario. A full schedule would include every year, or even every month, of your payments.

Total Payments: $572,331.31

Total Interest: $292,331.31

This schedule can tell us some important details:

• Of the almost $20,000 in mortgage payments you’ll make in the first year, over $15,000 goes toward interest.
• Somewhere between year 15 and 20, your payments start going more toward the principal and less toward interest.
• The amount you’ll pay in interest alone ($292,331.31) exceeds the original loan amount ($280,000). This isn’t necessarily bad, but it’s important in understanding the true cost of a home.

WARNING: Math Ahead

Keep reading to learn more. Or, if you’re ready to calculate your payments, visit the Mortgage Payment Calculator.

How are principal and interest calculated?

For math nerds who want to understand how this really works, keep reading. Lenders calculate P&I using an amortization formula. You can run the calculation on your own if you know these three variables:

• Principal – How much money you borrow
• Interest rate – A percentage of the principal a lender charges you to borrow money, expressed as a decimal
• Loan term – Length of time of the loan; expressed in number of months

Here’s how those factors come together to calculate a monthly P&I payment:

Monthly P&I Payment = Principal x [Interest Rate x (1 + Interest Rate)^{Loan Term}] / [(1 + Interest Rate^{Loan Term}-1]

Or, in simpler terms: M = P x [R x (1 + R)^N] / [(1 + R)^N - 1]

Let’s break that down.

First, let’s define the variables:

• M = P&I Payment (monthly)
• P = Principal
• R = Monthly Interest Rate (a decimal)
• N = Loan Term (in months)

Important to note: Depending on the type of mortgage you have, your P&I payment may remain the same every month or it may vary – either way, it goes toward principal and interest throughout the life of the loan.

Next, how to find the principal: Once you know your monthly payment, you can use the following formula to calculate how much of that amount will go toward principal vs. interest.

Principal Payment = Monthly P&I Payment - (Loan Balance x Interest Rate)

Notice how one of the variables is loan balance. That means this formula can be used to show the breakdown between principal and interest for any given month based on the current principal.

How to calculate the mortgage principal and interest step by step

Now, let’s run the numbers from our same example as above: $350,000 home, 20 percent down payment ($70,000), and a 30-year fixed rate mortgage with an interest rate of 5.5 percent.

Step 1: Assign your variables

To define the principal (P):

• Subtract your down payment from the purchase price
• $350,000 - $70,000 = $280,000

To define the monthly interest rate (R): 

• Convert your interest rate percentage into a decimal by dividing by 100 — then, divide that number by 12
• 5.5% ÷ 100 = 0.055
• 0.055 ÷ 12 = 0.004583

To define the loan term in months (N):

• Multiply the loan term in years by 12
• 30 x 12 = 360 months

We end up with:

• Principal (P) = $280,000
• Interest Rate (R) = 0.004583
• Loan term (N) = 360

Step 2: Calculate your monthly P&I payment

Use the amortization formula to calculate your monthly principal and interest payment.

M = P x [R x (1 + R)^N] / [(1 + R)^N - 1]

M = $280,000 x [0.004583 x (1 + 0.0046)³⁶⁰] / [(1 + 0.0046)³⁶⁰ -1]

M = $280,000 x [0.004583 x 1.004583³⁶⁰] / [1.004583³⁶⁰ -1]

M = $280,000 x [0.004583 x 5.186768] / [5.187388 - 1]

M = $280,000 x [0.023771 / 4.187388]

M = $280,000 x 0.005677

M = $1,590

Just as we got with the calculator, your monthly P&I payment will be about $1,590. But can we take it a step further to know how much of the monthly payment goes toward paying down the principal and how much goes toward interest?

Step 3: Calculate principal vs. interest

Let’s use the formula for determining your principal payment. Then, we can compare principal to interest each month.

Principal Payment = Monthly P&I Payment - (Loan Balance x Interest Rate)

Principal Payment = $1,590 - ($280,000 x 0.004583)

Principal Payment = $1,590 - $1,283.24

Principal Payment = $306.76

This means your first mortgage payment of $1,590 will have the following estimated breakdown:

• Principal – $307
• Interest – $1,283

The same calculation can be run again and again to show how your principal and interest amounts change from month to month. You simply subtract the previous payment’s principal payment from the previous balance to get the current loan balance. Then, plug it into the formula.

The bottom line

Understanding principal and interest doesn’t just make you a more informed borrower; it can save you money. Amortization tools allow you to see a full picture of P&I payments for the life of a loan. Take advantage of this ability to plug and play different loan amounts, interest rates, and loan terms.

And remember, your principal and interest payment isn’t the whole story. Your monthly mortgage payment will likely include other costs such as taxes and insurance. Take these expenses into account when budgeting for homeownership.