The Real Formula Used to Calculate Your Mortgage Payment
Buying a home can be overwhelming with so many costs, terms, and formulas, it’s easy to feel lost. In this article, I’ll break down how your monthly mortgage payment is really calculated, not just plugged into a calculator. Understanding the math gives you the power to compare options and take control of your mortgage journey. And most importantly, it shows why having a trusted mortgage advisor matters
4/25/20252 min read
Understanding Your Mortgage Monthly Payment
When you take out a mortgage, you're borrowing a lump sum and agreeing to repay it in equal monthly payments over a set number of years. In finance, this type of structure is known as an mortgage annuity(ordinary).
One of the most common questions borrowers ask is: "How much will I pay each month?" While online calculators can give you a quick answer, understanding the math behind your payment empowers you as a borrower giving you both confidence and control over your finances.
To break it down, we’ll use one of the most powerful and practical concepts in finance: the Annuity Discount Factor (ADF).
What Is the Annuity Discount Factor (ADF)?
The Annuity Discount Factor helps us calculate the present value of a series of fixed payments over time. In mortgage terms, it helps determine how much your regular monthly payments should be based on your loan amount, interest rate, and term easy right?
The formula is:
Where:
r = monthly interest rate (annual rate divided by 12)
T = total number of monthly payments (years times 12)
Monthly Mortgage Payment Formula
Let's use the Present Value of an Annuity formula and rearrange it to solve for the monthly mortgage payment (cash flow). Here's the step-by-step:
Where:
PV = loan amount (present value of all payments)
PMT = monthly mortgage payment
ADF=Annuity Discount Factor
Real Example: A $425,000 Mortgage at 6.959% for 30 Years
Let’s break it down:
Loan amount = $425,000
Annual interest rate = 6.959%
Monthly interest rate (r) = 9.959% / 12 = 0.005799167
Term (T) = 30 years x 12 months = 360 months
As you can see the monthly payment for this mortgage loan is exactly $2,849.87
Why This Matters to You
Understanding the ADF formula helps you see how changes in your interest rate or loan term affect your monthly payment. For example:
Higher interest rate = smaller ADF = higher payment
Longer term = larger ADF = lower monthly payment
Remember:
Each monthly payment is constant.
Over time, more of the payment goes toward principal and less toward interest (this is called amortization).
You can use this formula to compare loans, figure out affordability, or even build mortgage calculators!
Empower Your Mortgage Journey
Understanding this math empowers you to confidently compare loan options and have more meaningful conversations with your mortgage advisor. At Tulender.com, we’re all about explaining the “why” behind the numbers so you can make smart, informed decisions about one of the biggest financial commitments of your life.
💬 Need help running the numbers?
We’ve got you. Reach out to us — we’re here to guide you every step of the way.
