The basic formula: your loan balance times your annual rate, divided by 12
Mortgage interest is calculated by taking your current loan balance, multiplying it by your annual interest rate, and dividing by 12 to get the monthly charge. That monthly interest amount is what goes into your payment each month—the rest covers principal (the actual loan amount you borrowed).
The math is straightforward, but the outcome shifts every single month because your loan balance drops as you pay down principal. This is why your first payment is mostly interest and your last payment is mostly principal. The lender doesn't decide how much interest you owe each month—the math does.
For example, if you borrowed $300,000 at 6% annual interest, your first month's interest would be $300,000 × 0.06 ÷ 12 = $1,500. After your first payment, your balance drops (by however much principal you paid), so next month's interest is calculated on the smaller balance.
Key Takeaways
- Monthly interest = (current loan balance × annual interest rate) ÷ 12, and this amount changes every month as your balance shrinks.
- Your interest rate is locked in at closing and does not change on a fixed-rate mortgage, but the dollar amount of interest you pay each month does change.
- Early in the loan, most of your payment covers interest; late in the loan, most covers principal—this is called amortization.
- An amortization schedule shows exactly how much interest and principal you pay in each month of your entire loan.
Why your interest payment shrinks over time
Your loan balance is the only number that changes in the monthly interest formula. Your interest rate stays the same (on a fixed-rate mortgage), and 12 stays the same, but the balance gets smaller with every payment you make.
This is why a 30-year mortgage front-loads interest. In month one, you might pay $1,500 in interest and $400 in principal. By month 300, you might pay $50 in interest and $1,850 in principal. The total payment stays the same, but the split between interest and principal flips.
If you make extra principal payments, you shrink the balance faster, which means less interest accrues in the months that follow. This is why paying extra on your mortgage—even $50 or $100 per month—cuts years off the loan and saves thousands in interest.
Fixed-rate versus adjustable-rate mortgages
On a fixed-rate mortgage, your interest rate is locked in at closing and never changes. The rate you sign at 6% stays 6% for the entire 15, 20, or 30 years. The monthly interest calculation stays the same formula, but the rate in that formula never moves.
On an adjustable-rate mortgage (ARM), your rate is fixed for an initial period (often 3, 5, 7, or 10 years), then adjusts annually or semi-annually based on a market index. When the rate adjusts, your monthly interest calculation changes, which usually means your payment changes too. ARMs typically start with a lower rate than fixed mortgages, which is why some borrowers choose them, but the rate can rise significantly after the fixed period ends.
Most borrowers choose fixed-rate mortgages because the payment is predictable. With an ARM, you know the payment will change, but you don't know by how much until the adjustment date arrives.
How to read an amortization schedule
An amortization schedule is a table that shows every payment over the life of your loan. It lists the payment number, the payment amount, how much goes to interest, how much goes to principal, and what your remaining balance is after that payment.
Your lender provides this schedule at closing, and you can generate one online using a mortgage calculator. The schedule proves the math: add up all the interest columns and you see the total interest you will pay over the life of the loan. Add up all the principal columns and you see it equals your original loan amount.
The schedule also shows what happens if you pay extra. If you owe $1,200 per month but pay $1,300, that extra $100 goes straight to principal, which shrinks your balance faster and reduces the interest on every future payment. Some borrowers use the amortization schedule to plan extra payments strategically—for instance, paying extra in the early years when interest is highest.
The difference between interest rate and APR
Your interest rate is the percentage you pay on the loan balance each year. Your APR (annual percentage rate) includes the interest rate plus closing costs and fees, expressed as an annual rate. The APR is always higher than the interest rate because it accounts for the cost of getting the loan.
For the monthly interest calculation, you use the interest rate, not the APR. The APR is useful for comparing loans—it shows the true cost of borrowing—but it does not change how your monthly interest is calculated.
For example, you might see a mortgage advertised as "5.5% interest, 5.75% APR." The 5.5% is what you use in the formula. The 5.75% tells you that when you factor in closing costs, the true annual cost is slightly higher.
What happens if you pay early or late
If you pay your mortgage early in the month, your balance drops sooner, which means less interest accrues for the rest of that month. The difference is small on a single payment, but over years it adds up. Some borrowers set up bi-weekly payments (half the monthly payment every two weeks) to pay down the balance faster and reduce total interest.
If you pay late, interest continues to accrue on the full balance until the payment is received. Most mortgages have a grace period (often 15 days after the due date) before a late fee kicks in, but interest is still being calculated on the unpaid balance the whole time.
Missing a payment does not forgive the interest you owe—it adds to your balance. This is why falling behind on a mortgage is costly: you owe the missed payment, the interest that accrued during the miss, and potentially a late fee.
How property taxes and insurance affect your total payment
Your mortgage payment often includes more than just principal and interest. Many lenders require you to pay property taxes and homeowners insurance as part of your monthly payment. These amounts are held in an escrow account and paid to the taxing authority and insurance company on your behalf.
The interest calculation covers only the principal and interest portion of your payment. Property taxes and insurance are separate line items. If your property tax or insurance premium changes, your total payment changes, but the interest calculation method stays the same.
Some borrowers pay property taxes and insurance directly to the county and insurance company instead of through escrow. In that case, your mortgage payment is only principal and interest, and the interest calculation is exactly as described above.
Frequently Asked Questions
Why does my interest payment vary if my rate is fixed?
Your interest rate is fixed, but your loan balance shrinks every month. Since interest is calculated on the balance, the dollar amount of interest changes even though the rate does not. The rate stays the same; the balance does not.
Can I see how much interest I will pay over the life of my loan?
Yes. Your lender provides an amortization schedule at closing, or you can generate one using an online mortgage calculator. Add up the interest column to see the total. For a $300,000 loan at 6% over 30 years, total interest is roughly $215,000, though this varies based on your exact rate and loan term.
Does making one extra payment per year really save money?
Yes. One extra payment per year reduces your balance faster, which means less interest accrues in future months. Over a 30-year loan, one extra payment per year can cut 3 to 5 years off the loan and save tens of thousands in interest, depending on your rate and loan amount.
What is the difference between simple interest and amortizing interest?
Mortgages use amortizing interest, which recalculates each month based on your shrinking balance. Simple interest would charge the same amount every month regardless of how much principal you paid. Amortizing interest is standard for mortgages and is why paying extra principal saves you money.
If I refinance, does the interest calculation change?
Yes. Refinancing means you take out a new loan to pay off the old one. The new loan has a new rate, a new balance (possibly), and a new term. The interest calculation method is the same, but the numbers in the formula are different.