Understanding Mortgage Interest
Interest is a major cost of homeownership. Understanding how it works helps you make better financial decisions.
How Interest is Calculated
Mortgage interest is calculated monthly based on your outstanding principal balance. Each month:
- Annual rate ÷ 12 = Monthly rate
- Outstanding balance × Monthly rate = Interest charged
On a $300,000 loan at 6.5%: $300,000 × (6.5% ÷ 12) = $1,625 interest for first month.
Front-Loaded Interest
In the early years of a mortgage, most of your payment goes to interest, not principal. On a 30-year loan:
- Year 1: ~70% goes to interest
- Year 15: ~50% goes to interest
- Year 25: ~30% goes to interest
Reducing Total Interest
- Make extra payments: Direct more to principal
- Choose shorter term: 15-year loans have lower rates
- Refinance when rates drop: Lower rate = less interest
- Make biweekly payments: Effectively one extra payment/year