Mortgage interest is the cost of borrowing, and it is the reason a $280,000 loan can cost over $600,000 to repay. Understanding how interest is calculated — and why it shifts over time — is the key to seeing why extra payments save so much.
Interest is charged on the remaining balance
Each month, your lender calculates interest on the balance you still owe. The monthly interest charge is the remaining balance multiplied by the monthly rate (the annual rate divided by 12). Whatever is left of your payment after interest goes toward principal, reducing the balance for next month.
Why early payments are mostly interest
At the start of a loan, your balance is at its highest, so the interest portion of each payment is at its highest. Since your total payment is fixed, most of it goes to interest and only a little to principal. As the balance shrinks, the interest portion shrinks too, and more of each payment goes to principal. This gradual shift is called amortization.
A year-by-year look
| Year | Principal paid | Interest paid | Ending balance |
|---|---|---|---|
| 1 | $3,129.63 | $18,107.85 | $276,870.37 |
| 5 | $4,056.07 | $17,181.42 | $262,110.74 |
| 10 | $5,608.80 | $15,628.69 | $237,373.15 |
| 20 | $10,725.05 | $10,512.43 | $155,862.79 |
| 30 | $20,508.27 | $729.21 | $0.00 |
In year 1, only about $3,130 of your roughly $21,238 in payments goes to principal — the rest is interest. By year 20, the split has reversed, and by year 30 almost the entire payment is principal. This is why the early years of a mortgage build equity slowly.
How the rate affects total interest
Because interest compounds across hundreds of payments, even a small rate change has an outsized effect on total cost. On a $280,000, 30-year loan, the difference between 6.0% and 7.0% is about $184 a month — but over 360 payments that is roughly $66,000 in extra interest.
Three ways to pay less interest
- Make a larger down payment, so you borrow less and pay interest on a smaller balance.
- Choose a shorter term, which raises the payment but cuts years of interest accrual.
- Make extra principal payments, which reduce the balance and every future interest charge.
Of these, extra payments are the most flexible — you control when and how much, with no commitment to a higher required payment. On the same $280,000 loan, adding $100 a month pays it off about 51 months early and saves roughly $60,000 in interest.
See Your Extra-Payment Savings