How Mortgage Payments Are Actually Calculated

The interest is bigger than the loan

$300,000 borrowed at 6.5% over 30 years:

Monthly payment (principal & interest)	$1,896.20
Total paid over 360 payments	$682,633
Total interest	$382,633

That's 127.5% of what you borrowed, paid in interest.

It isn't a trick and it isn't unusual. It's what compounding over 360 payments does — and it's worth looking at once, in full, before the monthly figure becomes the only number in the conversation.

The formula

Monthly payment = P × i ÷ (1 − 1 ÷ (1+i)ⁿ)

where i is the monthly rate — the annual rate ÷ 12 ÷ 100, so 6.5% becomes 0.0054167 — and n is the number of payments, years × 12.

Both conversions live inside the formula rather than in a note beside it. A formula and its glossary drift apart, and the glossary is the part readers skip.

Your first payment puts $271 against the balance

Out of $1,896.20:

Interest	$1,625.00
Principal	$271.20

85.7% of your first payment never touches what you owe.

Interest is charged on the outstanding balance, and at the start the balance is the entire loan. The ratio flips slowly across the term — which is why the balance seems frozen for years and then falls off a cliff near the end.

Which is why extra payments early are worth so much more

An extra $1,000 in year one removes principal that would otherwise have accrued interest for 29 more years. The same $1,000 in year 25 removes five years of it.

This is the one lever on a fixed-rate mortgage that reliably moves the total, and its value falls steadily the longer you wait.

Check for early repayment charges first — some loans penalise exactly this.

This is not your monthly bill

Principal and interest only. Not what leaves your account.

Property tax, homeowners insurance, mortgage insurance and any HOA fee are usually collected alongside the payment, and together they routinely add hundreds a month.

So when a lender's quote comes in visibly higher than this figure, that's not a discrepancy — it's a different number. The industry term for the full one is PITI, and it's the one to ask for when you're working out what you can actually afford.

Rate is the input that matters most

Same loan, one percentage point:

Rate	Monthly	Total interest
6.5%	$1,896.20	$382,633
7.5%	$2,097.64	$455,152

$201 a month — and $72,518 over the term.

A rate difference that looks like a rounding error at the point of quotation is tens of thousands of dollars. It's worth more effort than almost anything else in the process, and it's the input people negotiate least.

What a shorter term does

Term	Monthly	Total interest
30 years	$1,896.20	$382,633
15 years	$2,613.32	$170,398

$717 more a month saves $212,235 in interest.

Fewer payments have to cover the same principal, so each one is bigger — but the balance falls far faster, so interest accrues on less for less time.

Whether the higher payment is affordable is a completely separate question from whether it's cheaper. Only one of those two is arithmetic.

Enter what you're borrowing, not what the house costs

Price minus deposit.

Entering the house price gives you the payment on a loan nobody offered you — which is a surprisingly common way to talk yourself out of, or into, a house.

If you're working the other direction, start from a payment you're comfortable with and work back to a price, rather than forward from a price you like.

Print the comparison sheet — it has a column for total interest next to the monthly payment, because that's where offers actually differ and it's the column lenders lead with least.

Fees, points, PMI, variable rates and overpayments aren't modelled here. This is arithmetic, not financial advice.