A monthly mortgage payment is made up of two components: principal and interest. The principal is the amount you borrow from a lender (and have to pay back). The interest is what the lender charges for borrowing money.
When you apply for a mortgage, your lender figures out the loan amount, interest rate, and loan term (typically 15–30 years). Then they use that information to calculate your monthly payment.
You can save money in the long term by paying down the principal loan. The less the amount of the principal loan, the less interest it will accrue over time.
You can learn how to calculate principal and interest amounts on mortgage payments. Principal and interest calculations can help you understand monthly payments, the total cost of a loan, and the interest rate. Then you can make a payoff plan that will save you the most money in the long run.
How to calculate principal and interest
Principal = purchase price - down payment
Monthly interest = (principal × interest rate) ÷ 12 months
Monthly principal = monthly mortgage payment - interest payment = monthly principal payment
How to calculate principal
To calculate the principal of your mortgage loan, you subtract your down payment from the purchase price.
For example, if you buy a $500,000 home and have a down payment of $80,000, your principal would be $420,000.
How to calculate total interest
Calculating total interest on your mortgage loan is complicated. We recommend using a calculator. You’ll need to input the principal loan amount ($420,000), the interest rate (7%), and the loan term (30 years).
So if the principal is $420,000 and the interest rate is 7% and the loan term is 30 years, the total interest would be $585,937.
How to calculate a monthly payment
To calculate principal and interest, first you’ll need your monthly mortgage amount. Take the purchase price of the home and the mortgage interest rate and plug them into an online calculator to calculate your monthly payment.
For a $500,000 home with a 7% mortgage interest rate, your monthly payment would be around $2,794.
That payment is split between principal and interest. As you pay down the principal balance, the interest your loan accrues will also go down.
How to calculate your monthly interest payment
To calculate your monthly interest payment, multiply the principal by the annual interest rate and then divide that total by 12 months.
For our example, the principal is $420,000 multiplied by the 7% interest rate is $29,400. Divide that by 12, and you get $2,450.
That means of your $2,794 monthly payment, $2,450 will go to paying off the interest each month rather than the principal.
How to calculate your monthly principal payment
To calculate your monthly principal payment, subtract the monthly interest payment ($2,450) from your monthly mortgage payment ($2,794). What's left over ($344) is the amount going to your principal each month.
However, you can choose to pay more of your principal loan every month if you want to lessen the amount of interest you accrue over time.
How to save on mortgage interest
To reduce the amount of mortgage interest you pay in the long run, you can pay more toward your principal each month.
For example, if you pay $100 extra toward the principal every month ($2,894 PI), you'll save $73,394 in long-term interest. Plus, you'll pay off your mortgage 10% faster and over three years sooner.
If you pay an extra $200 per month ($2,994 PI), you'll save $128,199 over time. And you'll pay the loan off 18% faster and 5.5 years sooner. An extra $300 per month will save you $171,140 in interest and shorten the loan by 7.5 years.
Potential principal payments for $420,000 example
Monthly PI payment
Total interest paid
Time until payoff
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!
But, paying more on monthly mortgage payments can reduce your financial flexibility. You won't have as much income to invest in retirement, pay off other debt, or use in an emergency. You also might not be able to save as much as you would like to.
Interest vs. principal: How mortgage payments work
Your mortgage payment consists of interest and principal payments.
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 fixed 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 away.
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 loan 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.
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.
Other items included in a monthly mortgage payment
Your mortgage payment consists of principal and interest (PI). But you likely have other monthly expenses included in the payment.
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.
Property taxes and insurance
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 homeowner's 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.
Private mortgage insurance (PMI)
If you put down less than 20% for a conventional mortgage loan, you'll need to pay private mortgage insurance (PMI).
The lower down payment means that lenders are taking a higher risk by lending to you. PMI is a monthly insurance payment that protects the lender if you stop paying your loan.
You can avoid having to pay PMI by putting down a higher down payment. Remember, PMI will be an additional payment to your monthly mortgage. If what you can save is greater than your refinancing costs, it can be worth refinancing to get rid of PMI.
If you live in certain communities or subdivisions, you might have to pay Homeowners Association (HOA) fees. HOA fees are extra payments on top of your monthly mortgage payments. They cover general maintenance costs for shared spaces, like pools, lobbies, and clubhouses.