Understanding mortgage interest is crucial for any homeowner. The interest you pay can exceed your original loan amount over a 30-year term. This guide explains how mortgage interest is calculated and how you can minimize it.
The Basics of Mortgage Interest
Mortgage interest is the cost of borrowing money to buy a home. It's calculated as a percentage of your remaining loan balance and is typically paid monthly along with your principal payment.
The Mortgage Payment Formula
M = P × [r(1+r)^n] / [(1+r)^n - 1]
Where M = monthly payment, P = principal, r = monthly interest rate, n = number of payments
Amortization: How Payments Are Applied
In the early years of your mortgage, most of your payment goes toward interest. As you pay down the principal, more of each payment goes toward principal.
Example: $300,000 Loan at 6.5% for 30 Years
| Year | Interest | Principal |
|---|---|---|
| Year 1 | $19,300 | $3,400 |
| Year 5 | $18,600 | $4,100 |
| Year 15 | $14,800 | $7,900 |
| Year 25 | $7,200 | $15,500 |
| Year 30 | $1,200 | $21,500 |
Use our mortgage calculator with amortization schedule to see your complete payment breakdown.
Factors That Affect Your Interest Rate
Credit Score
Higher scores typically mean lower rates. A 760+ score can save you 0.5-1% compared to a 680 score.
Down Payment
Larger down payments reduce lender risk and can qualify you for better rates.
Loan Term
Shorter terms (15-year) usually have lower rates than longer terms (30-year).
Loan Type
Conventional, FHA, VA, and USDA loans have different rate structures.
Fixed vs. Adjustable Rates
Fixed-Rate Mortgage
- • Rate stays same for entire term
- • Predictable monthly payments
- • Best for long-term ownership
- • Slightly higher initial rate
Adjustable-Rate (ARM)
- • Rate changes after fixed period
- • Lower initial rate
- • Risk of higher payments later
- • Good for short-term ownership
How to Minimize Interest Costs
- 1
Make extra payments — Even small additional payments toward principal can save thousands.
- 2
Choose a shorter loan term — 15-year mortgages have lower rates and much less total interest.
- 3
Improve your credit score — Before applying, pay down debt and fix any credit report errors.
- 4
Make bi-weekly payments — Results in one extra payment per year, reducing your term.
Calculate your mortgage interest