How to calculate your mortgage step by step (with examples)
Calculating a mortgage sounds complicated, but it really comes down to one formula. In this guide I explain how the math works, the mistakes almost everyone makes when comparing offers, and how to know if fixed or variable rate is best for you.
🏠 Use the mortgage calculator →1. What do you need to start?
To calculate a mortgage you only need three numbers:
- Principal (C): the money the bank lends you. Usually 80% of the property price.
- Annual interest rate (i): the % the bank charges. In Europe in 2026, fixed rates are around 3-3.5%.
- Term (n): how many months to pay it back. 20-30 years (240-360 months) is standard.
2. The monthly payment formula
Mortgages typically use the French amortization system: constant payment, mostly interest at the beginning and mostly principal at the end. The formula:
Payment = C × [r × (1+r)ⁿ] / [(1+r)ⁿ − 1]Where r is the monthly rate (annual divided by 12, expressed as a decimal).
3. Real example
Imagine borrowing $200,000 at 3.5% annual for 25 years:
- r = 3.5 / 100 / 12 = 0.00291667
- n = 25 × 12 = 300 months
- Payment = 200,000 × [0.00291667 × (1.00291667)³⁰⁰] / [(1.00291667)³⁰⁰ − 1]
- Monthly payment ≈ $1,001.55
Over 25 years you'll have paid:
- Total paid: 1,001.55 × 300 = $300,466
- Interest paid: 300,466 − 200,000 = $100,466
That is 50% on top of the home value in interest alone. That is why paying down early is so powerful.
4. Fixed or variable rate?
Fixed rate
The interest never changes for the life of the loan. You always pay the same.
- ✅ Full peace of mind: you know what you will pay in 20 years.
- ❌ Usually higher at the start than variable.
- 👍 Best when: you don't want surprises or expect rates to rise.
Variable rate
The rate is reference rate + margin (e.g. EURIBOR + 0.8%). Reviewed every 6 or 12 months.
- ✅ Usually cheaper if rates are low.
- ❌ Your payment can rise a lot if rates rise (as in 2022-2023).
- 👍 Best when: you have financial buffer and rates are high (expecting them to drop).
5. Common mistakes
- Forgetting closing costs. Beyond the 20% down payment, budget another 8-12% for notary, registry, taxes, appraisal and fees.
- Skipping home and life insurance. Often required, adding $30-80/month.
- Comparing only the payment. What matters is the APR, which includes fees.
- Not considering prepayment. Paying $100/month extra can save you $20,000+ in total interest.
6. How much mortgage can you afford?
Bank rule of thumb: monthly payment should not exceed 30-35% of net monthly income.
- If you earn $1,800/month → max payment ~$630/month.
- Combined couple $3,500/month → max payment ~$1,225/month.
7. Calculate your mortgage now
🏠 Mortgage calculator →Conclusion
Calculating a mortgage is not magic: one formula, three numbers. What really matters is comparing well (look at APR, not the payment), including all costs in your budget, and having buffer for surprises. If you are between two offers, calculate the payment for each and sum total interest. The difference will surprise you.