On a standard fixed-rate mortgage, interest is charged once a month on the balance you still owe. The monthly rate is the annual rate divided by 12. The payment itself is fixed so that the loan is exactly paid off at the end of the term.
Step 1: the monthly payment
P is the amount borrowed, r the monthly rate and n the number of payments. For a $250,000 loan at 6% for 30 years: r = 0.06 ÷ 12 = 0.005 and n = 360, so M = $1,498.88.
Step 2: split each payment
Each month, interest = balance × r. The rest of the payment reduces the balance.
| Payment | Balance before | Interest (× 0.004999999999999999) | Principal | Balance after |
|---|---|---|---|---|
| 1 | $250,000.00 | $1,250.00 | $248.88 | $249,751.12 |
| 2 | $249,751.12 | $1,248.76 | $250.12 | $249,501.00 |
| 3 | $249,501.00 | $1,247.51 | $251.37 | $249,249.63 |
Month one: $250,000 × 0.005 = $1,250.00 of interest, leaving $248.88 for principal. Month two charges interest on the slightly smaller balance, so a few cents more go to principal, and so on. Principal first exceeds interest at payment 223, more than 18 years in.
Step 3: the totals
Over 360 payments this loan repays the $250,000 borrowed plus $289,595 of interest, for $539,595 in total. The amortization schedule lists every month.
What changes the interest you pay
- Rate: each percentage point matters most on long terms; compare offers with the mortgage calculator.
- Term: shorter terms pay down the balance faster — see 15 vs 30 years.
- Extra principal: lowers the balance that every later month's interest is charged on — see the early payoff calculator.
Why a lower rate matters more on a longer loan
Because interest compounds on the balance month after month, the rate works on a large balance for many years in a 30-year loan. Cutting the rate by half a point lowers the first month's interest by only a small amount, yet over 360 payments the saving adds up to thousands of dollars, since every month's balance is a little lower than it would have been. The same logic explains why extra principal paid in the first years saves far more than the same amount paid near the end: early dollars remove balance that would otherwise have been charged interest for decades.
Servicers round interest to the cent each month, so their schedule can differ from a full-precision calculation by a few cents per payment, with the difference settled in the final payment.