Each mortgage payment you make represents a combination of interest and principal repayment. Over the life of the mortgage, the proportion of interest to principal will change. Here is how that works.

Key Takeaways

  • A typical mortgage payment consists of both interest and repayment of principal.
  • As more of your principal is repaid, the less interest you owe on it.
  • With a traditional, fixed-rate mortgage, your monthly payment will remain the same for the life of the loan, but the portion that goes toward interest will decline, while the principal portion will increase.

How Does Mortgage Interest Work?

With a traditional, fixed-rate mortgage, your monthly payments will remain the same for the life of the loan, which might, for example, be 10, 20, or 30 years.

Initially, your mortgage payment will primarily go toward interest, with a small amount of principal included. As the months and years go by, the principal portion of the payment will steadily increase and the interest portion will decrease. That's because interest charges are based on the outstanding balance of the mortgage at any given time, and the balance decreases as more principal is repaid. The smaller the mortgage principal, the less interest you'll be paying.

This process is known as amortization. When you take out a mortgage, your lender can provide you with an amortization schedule, showing the breakdown of interest and principal for every monthly payment, from the first to the last.

Example of Mortgage Interest Over Time

To illustrate how amortization works, consider a traditional, fixed-rate mortgage for $100,000 at an annual interest rate of 2% and a time to maturity of 30 years.

The monthly mortgage payment would be fixed at $369.62.

The first payment would include an interest charge of $166.67 and a principal repayment of $202.95. The outstanding mortgage balance after this payment would be $99,797.05.

The next payment would be equal to the first, $369.62, but with a different proportion of interest to principal. The interest charge for the second payment would be $166.33, while $203.29 will go toward the principal.

By the time of the last payment, 30 years later, the breakdown would be $369 for principal and 62 cents for interest.

This example applies to a basic, fixed-rate loan. If you have a variable- or adjustable-rate mortgage, it is also likely to apply a greater portion of your monthly payment to interest at the outset and a smaller portion as time goes on. However, your monthly payments will also adjust periodically, based on prevailing interest rates and the terms of your loan.

There is also a less common type of mortgage, called an interest-only mortgage, in which the entirety of your payment goes toward interest for a certain period of time, with none going toward principal.