How to calculate mortgage payment interest and principal

Calculate principal and interest | Mortgage payment breakdown | FAQs

Your mortgage payments consist of two elements: the mortgage principal amount and the interest on the loan principal balance. When you take out a mortgage, your lender calculates your monthly payment using the original loan amount, interest rate, and loan term (typically 15 to 30 years).

You can reduce how much you'll pay in total interest significantly by paying down your principal faster. Doing so will also help you pay off your loan earlier.

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Save on interest with principal mortgage payments

Let's say you take out a $300,000 30-year fixed rate mortgage with a 5.5% interest rate.

If you pay only your principal and interest (PI) every month for 30 years ($1,703 over 360 months), you’ll pay $313,415 in total interest.

But pay $100 extra toward principal every month ($1,803 PI), and you’ll save $46,334 in long-term interest. Plus, you’ll pay off your mortgage almost four years sooner. Double that extra payment to $200 dollars ($1,903 PI), your interest savings jump to $79,767.

The more you can pay toward the principal over the life of your loan, the more you’ll save in interest — and you’ll own your home outright sooner, too!

» JUMP: How mortgage payments work

How to calculate mortgage payments

Monthly payment = interest + principal
Interest payment = (principal × annual interest rate) ÷ 12 months
Principal = monthly payment – interest payment

Let's use the $300,000 fixed-rate mortgage example again, with a monthly payment of $1,703.

To find out how much you're paying in principal and interest each month, multiply the principal ($300,000) by the annual interest rate of 5.5% (0.055). Then, divide that total ($16,500) by 12 months. The result is $1,375 in interest.

Subtract that month’s interest payment ($1,376) from your fixed monthly payment ($1,703) The remainder ($328) is the amount of your payment applied to the principal.

($300,000 × 5.5% (0.055) = $16,500) ÷ 12 = $1,375 in interest
$1,703 monthly payment – $1,375 interest = $328 principal

How do you calculate a mortgage payoff?

You’ll need to know the mortgage payoff amount if you want to refinance or sell your home. Your lender will have the exact sum, which will be date specific, but you can get an idea of what you’ll owe.

1. Multiply your principal balance (which you can find on your most recent mortgage statement) by the interest rate for the annual interest amount.
2. Divide the annual interest by 365 to get the daily rate.
3. Count the days from the statement date to your anticipated payoff date.
4. Multiply the total number of days by the daily interest rate (from step 2) for the total interest due by that date.
5. Add the total interest due to the outstanding principal balance.
6. Add the prepayment penalty (if applicable) to the total amount.

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How mortgage payments work

Your mortgage payment consists of principal and interest (PI).

You pay off your mortgage according to an amortization schedule, which lets you budget fixed mortgage payments over the life of the loan. Amortization refers to your shrinking balance as you make payments.

Amortization schedules maintain the same PI payment amount throughout the loan term on fixed-rate mortgages.

Typically, the first half of the amortization schedule pays down interest first. But the principal amount grows larger than the interest payments during your amortization schedule's second half.

That’s how your payment breakdown equals interest payments higher than your principal payments over the first half of loan amortization.

What portion of your mortgage is principal?

The amount applied to the principal initially depends on whether it's a shorter-term (e.g., 15-year) or longer-term (e.g., 30-year) amortization schedule.

Mortgage payments on:

• Long-term loans are attached to interest for the first half of the loan.
• Short-term loans start with a nearly even principal and interest breakdown.

Short-term loans

With a short-term fixed-rate mortgage, principal quickly overtakes interest — sometimes, right way.

Compared with a 30-year mortgage, shorter-term loan payments are much higher — but usually with a lower interest rate. That means you'll pay less interest, allowing lenders to apply more money to the principal sooner.

Do additional payments go toward principal?

Don't assume your lender will automatically apply any extra payments to the outstanding principal amount. Ask your lender about the procedure and whether you need to stipulate that the extra amount is a principal-only payment.

Additional payments (anything greater than your monthly mortgage) may be applied to principal or interest. It depends on your loan agreement and your communication with the lender.

Your mortgage payment consists of principal and interest (PI). But you may have other monthly expenses. Consider all these additional costs in your monthly budget when deciding whether you can afford extra payments to pay down your mortgage principal and how much to pay.

PITI

The most common additional payments are taxes and insurance (TI). Together, the payment is commonly called PITI.

Your lender will apply the principal and interest to your home loan and put the taxes and insurance payments in an escrow account. Then, your lender pays the tax bill and annual insurance premium out of escrow when they come due each year.

PMI

You need to budget private mortgage insurance (PMI) if your down payment is less than 20% of the home price.

HOA fees

Homeowners association fees are also common monthly expenses for communities like condos or subdivisions.

FAQs

Principal is the money you borrow. Interest is the fee lenders charge you to borrow that money, based on a percentage of the principal. You pay back your loan and the fee in monthly installments. Lenders calculate the interest portion of your mortgage payment by multiplying the principal balance by the interest rate. Learn more.

Paying down principal faster saves money. The principal amount determines the total interest owed and the monthly interest payments. So as the principal shrinks, the less interest you’re charged. Learn more.

The interest amount is calculated as a percentage of the outstanding balance. As you repay your loan, lenders apply your payments to both the interest and the principal. Installment loan payments are the same amount every month. Learn more.

With a 30-year fixed-rate loan, you pay off more interest than principal during the first half of your loan term. As time goes on, more of the mortgage payment is applied to the principal than to interest. But you can save money on interest and shorten the payoff period by making extra payments toward principal. Learn more.

To find the interest portion for the month, multiply the outstanding principal (your current loan amount) by the annual interest rate, and divide that number by 12. To find the principal portion of your payment, subtract the interest portion from the total mortgage payment (excluding taxes and insurance escrow amounts). Learn more.

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