Where every dollar of a mortgage payment goes
How a month of mortgage interest is computed
In one paragraph
Take the principal balance after last month's payment, multiply by the annual interest rate, and divide by twelve. That is the interest due this month. The rest of the fixed payment reduces principal. Because the balance is largest at the start, early payments are mostly interest and later payments are mostly principal.
Last reviewed against the primary sources listed below.
The formula
Monthly interest = balance × (annual rate ÷ 12). Your statement's interest line should match this to within rounding. If it does not, ask your servicer how they compute it.
Why the first payment is mostly interest
The payment is set so the loan reaches zero on schedule. With the balance at its highest, the interest share is at its highest too. The CFPB explains amortization in the same terms.
Does a quarter point make a difference?
Yes, because the rate multiplies the balance every month for the life of the loan. The bigger the balance and the longer the term, the more a small rate difference adds up. Run both rates through the schedule tool with your own balance to see the gap.
Common questions about interest
How do they calculate interest on a home loan?
Each month, the lender multiplies the outstanding principal by the annual rate divided by twelve. The rest of the payment goes to principal.
How is interest calculated and how does it work?
Interest is charged on the remaining balance. As principal falls, each month's interest falls, and more of the same payment goes toward principal.
Does .25 interest make a difference?
Yes. Over many years even a quarter point changes total interest noticeably. Enter both rates in the schedule tool with your balance to compare.
What is a simple mortgage?
People usually mean a fixed-rate, fully amortizing loan: one rate, one payment, and a balance that reaches zero at the end of the term.