A fixed-rate mortgage payment never changes, but what it is made of changes every month. Early on, most of it is interest; near the end, almost all of it is principal. Understanding that shift explains why extra payments help so much and why a small rate difference is expensive.
For a loan of L, a monthly interest rate r (the annual rate divided by 12), and n monthly payments, the fixed payment is:
Take a 320,000 loan at 6.5% over 30 years. The monthly rate is 0.065 ÷ 12 ≈ 0.005417 and n = 360, which gives a payment of about 2,022.62. Over the full term you will pay 2,022.62 × 360 ≈ 728,142, which is roughly 408,142 of interest on top of the 320,000 borrowed.
Each month the lender charges interest on the remaining balance, and whatever is left of your payment reduces the balance. Because the balance starts high, the interest portion starts high. Using the same loan:
In the first month, about 86% of your payment is interest. At the halfway point of the term, you have paid for fifteen years yet interest is still over 60% of each payment. Only in the last few years does principal dominate. This is not a trick; it is simply interest being charged on a balance that falls slowly at first.
Consider a 300,000 loan at 6.5%. Over 30 years the payment is about 1,896.20 and total interest is roughly 382,633. Over 15 years the payment rises to about 2,613.32, but total interest falls to roughly 170,398. You pay about 717 more each month and save around 212,000 over the life of the loan. The shorter loan is cheaper because the balance shrinks faster, so less principal is exposed to interest for less time.
The longer loan is not "wrong", though. The lower payment gives breathing room and lets you invest or save the difference, which may or may not beat the interest rate you are paying. It is a tradeoff between monthly cash flow and total cost, and the right answer depends on your income stability and other goals.
On the same 300,000, 30-year loan, a 6% rate gives a payment of about 1,798.65 and total interest of about 347,515. At 7%, the payment is about 1,995.91 and total interest about 418,527. One percentage point adds around 197 a month and roughly 71,000 over the term. Because the effect compounds across hundreds of payments, comparing rate offers carefully is worth the effort.
The principal-and-interest figure is only part of the cost of owning a home. Depending on where you live, you will probably also pay:
When deciding how much house you can afford, budget for the total, not just the loan payment.
A fixed-rate loan keeps the same rate and payment for the whole term, as modelled above. An adjustable-rate mortgage starts with a rate that is usually lower, then resets periodically based on a market index. If rates rise, so can your payment. The calculator on this site assumes a fixed rate, so treat ARM figures as a starting estimate only.
All figures in this guide are illustrations calculated with the standard formula; real loans can differ slightly because of rounding, fees and lender conventions. This is general information, not financial advice, so confirm exact numbers with your lender.
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