How Mortgage Interest is Calculated

Understanding how mortgage interest is calculated is one of the most important steps in becoming a confident homebuyer. Whether you’re buying your first home or refinancing your current one, knowing how interest works helps you budget, compare loan options, and make smart financial decisions. Let’s break it down in a way that’s easy to follow.

What is Mortgage Interest?

Mortgage interest is the cost you pay to borrow money from a lender. It’s expressed as a percentage of your loan amount, and it’s part of your monthly mortgage payment. Most home loans are amortized, which means you pay both principal (the amount you borrowed) and interest each month over the life of the loan.

How Is Mortgage Interest Calculated?

Interest is typically calculated monthly using this formula:

Interest = (Loan Balance x Interest Rate) / 12

This gives you the amount of interest due for that particular month. In the early years of a loan, a larger portion of your monthly payment goes toward interest. Over time, more of your payment goes toward reducing your principal.

Example 1: 30-Year Fixed-Rate Mortgage

• Loan Amount: $300,000
• Interest Rate: 6% annually

Monthly Interest Calculation:

$300,000 x 0.06 = $18,000/year
$18,000 / 12 = $1,500/month (initial interest portion)

So, in your first month, about $1,500 of your mortgage payment would go toward interest. As you make payments, the loan balance decreases, and so does the interest portion.

Example 2: After a Few Years

Let’s say you’ve paid your loan down to $250,000:

$250,000 x 0.06 = $15,000/year
$15,000 / 12 = $1,250/month interest

You’re now paying $250 less in interest each month compared to when you started. That means more of your payment is going toward paying down the loan.

Why It Matters

• Knowing how interest works helps you compare loans and choose the best one for your situation.
• Making extra payments toward the principal can reduce how much interest you pay over time.
• Understanding the math can help you decide whether refinancing or making a bigger down payment is worth it.

Final Thoughts

Mortgage interest may seem complicated at first, but once you understand the basics, it becomes much clearer. If you have questions about your loan options or want to see how interest affects your buying power, contact us at any time.

Get prequalified today or contact me for a personalized review.

Frequently Asked Questions

Does mortgage interest change over time?

It depends on your loan type. Fixed-rate loans have the same interest rate for the life of the loan, while adjustable-rate mortgages (ARMs) can change based on market conditions.

Can I lower the amount of interest I pay?

Yes. Making extra payments toward the principal, choosing a shorter loan term, or refinancing to a lower rate can all reduce your total interest paid.