How your monthly mortgage payment is calculated
A mortgage is repaid in equal monthly installments. Each installment first covers the interest owed that month, and the rest reduces the loan. The fixed installment comes from the standard amortization formula:
M = P × r(1 + r)n ÷ ((1 + r)n − 1)
- M = monthly payment
- P = loan amount (home price minus down payment)
- r = yearly interest rate ÷ 12, as a decimal
- n = number of monthly payments (years × 12)
Example: a $320,000 loan at 6.5% for 30 years gives r = 0.065 ÷ 12 ≈ 0.005417 and n = 360. The payment works out to $2,022.62 a month, before property tax and insurance.
Why most of your early payments go to interest
Interest is charged on the balance you still owe. At the start the balance is at its highest, so the interest share of each payment is large. As the balance falls, the same payment pays off more principal every month.
The bead chart above shows this. Early rows are mostly saffron (interest) and later rows are mostly jade (principal). On the example loan above you would pay about $408,000 in interest, more than the $320,000 you borrowed.
Ways to pay less interest
- A larger down payment lowers the loan amount, so every year's interest is charged on a smaller balance.
- A shorter term raises the monthly payment but cuts total interest sharply. Try 15 and 30 years in the calculator and compare.
- Extra monthly payments go straight to principal. Even a small amount can take years off the loan. The extra payment field shows exactly how much you save.
- A lower rate matters more than it looks. On a large loan, one percentage point can change the total interest by tens of thousands.
Before paying extra, check whether your lender charges an early repayment fee.