How Mortgage Interest Works

Mortgage interest is the fee charged by a lender for borrowing money. Understanding how it is calculated reveals why mortgages are structured the way they are.

Periodic Interest Math

The Mortgage Decision Engine calculates interest periodically based on your chosen payment frequency. For a monthly payment, the monthly interest rate is simply your annual rate divided by 12.

Because the calculation is always based on the current balance, you pay the most interest in the first period, when the balance is highest. Every period, as you pay down the principal, the next period's interest charge shrinks slightly. Use the Mortgage Calculator to model that balance over time.

The Front-Loaded Reality

On a standard 30-year loan, more of the scheduled payment commonly goes to interest in the early years than in later years. Extra principal payments made earlier can reduce the balance used for later interest calculations. See payment-by-payment interest examples in the Total Interest Tables.