How Mortgage Payments Work
Understand what makes up a mortgage payment, the amortization formula, and how to pay less interest over the life of the loan.
Try the loan & mortgage calculatorPut these numbers to workOpen →A fixed-rate mortgage payment stays the same every month, but what it is made of changes over time. Each payment covers two things: interest (the cost of borrowing) and principal (the amount that actually reduces your balance). Property tax and insurance are often bundled in too, but the core of the payment is principal and interest.
The formula behind your payment
Lenders use the standard amortization formula to work out a level monthly payment that pays the loan off exactly at the end of the term:
Because the payment is fixed, lowering the rate or shortening the term changes how much you pay each month — and dramatically changes the total interest.
Why early payments are mostly interest
Interest is charged on the outstanding balance, which is largest at the start. So in the early years most of each payment goes to interest and only a little to principal. As the balance shrinks, the split flips and more of every payment attacks the principal. That is why an amortization schedule shows the balance falling slowly at first, then faster.
What changes your payment
- •Interest rate — even 0.5% makes a large difference over 30 years.
- •Loan term — a 15-year loan has higher payments but far less total interest than a 30-year loan.
- •Amount borrowed — a bigger down payment means a smaller loan and payment.
- •Taxes and insurance — a full monthly payment (PITI) adds property tax, homeowners insurance and sometimes PMI on top of principal and interest.
Ways to pay less interest
- •Put down a larger deposit to borrow less.
- •Choose a shorter term if you can afford the higher payment.
- •Make extra principal payments — even one extra payment a year shortens the loan.
- •Refinance when rates fall enough to beat your closing costs.
- 1Enter the loan amount, interest rate (APR) and term into the calculator.
- 2Check the monthly payment, total interest and total cost.
- 3Open the amortization schedule to see how the balance falls year by year.
- 4Try a shorter term or lower rate to see how much interest you could save.