How mortgage payments are calculated β and why the first years are almost all interest
2026-09-22
A $400,000 loan at 6.5% for 30 years costs $2,528 a month. In month one, $2,167 of that is interest and only $361 reduces the balance. Ten years in you still owe about $339,000. Understanding why makes the numbers on a loan estimate much less mysterious.
Open the calculator
The formula
Payment = P Γ r Γ· (1 β (1 + r)^βn), where P is the loan amount, r the monthly rate (annual Γ· 12) and n the number of months. Each month's interest is the remaining balance Γ r; whatever is left of the payment reduces the balance. Because the balance is highest at the start, so is the interest share.
PITI: the real monthly number
- Principal and interest β the formula above
- Property tax β typically 0.5β2 % of home value per year, divided by 12
- Homeowners insurance β roughly $100β250 a month
- HOA dues if applicable
- PMI if your down payment is under 20 %, usually 0.5β1.5 % of the loan per year
What extra payments do
Paying an additional $200 a month on the example loan saves about $87,000 in interest and finishes the loan six years early, because every extra dollar goes straight to principal. Run the loan calculator with a shorter term to see the equivalent effect.