How mortgage payments work: amortization explained
A mortgage feels complicated, but the monthly payment comes from one tidy formula — and once you see how the principal/interest split shifts over time, decisions like extra payments and refinancing become obvious.
The monthly payment formula
A fixed-rate mortgage uses an amortizing payment: the same amount every month, calculated so the loan hits exactly zero at the end of the term. The formula is M = P · r(1+r)ⁿ / ((1+r)ⁿ − 1), where P is the loan amount, r the monthly rate (APR ÷ 12), and n the number of months.
You never need to do this by hand — the Mortgage Calculator plugs in your numbers and shows the full schedule — but knowing the inputs (amount, rate, term) is what lets you reason about trade-offs.
Why early payments are almost all interest
Each month, interest is charged on the remaining balance. Early on the balance is huge, so most of your payment is interest and only a sliver reduces principal. As the balance falls, the interest portion shrinks and principal accelerates — the split flips somewhere in the back half of the loan.
How extra principal changes everything
Any dollar above the scheduled payment goes straight to principal, which removes all the future interest that dollar would have accrued. On a $300k / 30-year / 7% loan, an extra $200/month saves over $67,000 in interest and clears the loan about 5 years early.
- Extra payments early are worth far more than the same amount late.
- A guaranteed, tax-free return equal to your mortgage rate — hard to beat risk-free.
- Always confirm extra payments are applied to principal, not next month’s bill.
Frequently asked questions
- What is the difference between APR and interest rate?
- The interest rate is what the lender charges on the principal. The APR folds lender fees — origination, points, mortgage insurance — into one annualized number, so it is always equal to or higher than the interest rate and is the fairer figure for comparing offers.
- Does my payment include taxes and insurance?
- Your principal & interest payment does not. Lenders often collect property tax and homeowners insurance in an escrow account on top, which is why your total monthly housing cost (PITI) is higher than the calculator’s P&I figure.
- Is it better to pay extra or invest the difference?
- Paying extra earns a guaranteed return equal to your mortgage rate. Investing might earn more but carries risk. A common approach: capture any employer 401(k) match first, then weigh extra payments against expected investment returns.
Run your own numbers
Put this guide into practice — these calculators run free in your browser.