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.
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.
Monthly PI payment
Time till payoff
26 years, 3 months
23 years, 5 months
Based on a $300,000 loan for 30-year mortgage with a fixed interest rate of 5.5%
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
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.
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.
- Multiply your principal balance (which you can find on your most recent mortgage statement) by the interest rate for the annual interest amount.
- Divide the annual interest by 365 to get the daily rate.
- Count the days from the statement date to your anticipated payoff date.
- Multiply the total number of days by the daily interest rate (from step 2) for the total interest due by that date.
- Add the total interest due to the outstanding principal balance.
- Add the prepayment penalty (if applicable) to the total amount.
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.
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.
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.
You need to budget private mortgage insurance (PMI) if your down payment is less than 20% of the home price.
Homeowners association fees are also common monthly expenses for communities like condos or subdivisions.