A mortgage is a loan secured by real estate. You borrow money from a lender to buy a home, and in exchange, the lender holds a lien on the property until the loan is fully repaid. If you stop making payments, the lender can foreclose and take the home.
The Four Parts of a Mortgage Payment
Most mortgage payments cover four things, often abbreviated as PITI:
- Principal — the portion that reduces your loan balance
- Interest — what the lender charges for the loan
- Taxes — property taxes collected monthly into escrow
- Insurance— homeowner's insurance (and PMI if applicable) collected monthly
When lenders advertise a monthly payment, they often show only principal and interest (P&I). The real monthly cost is higher once you add taxes and insurance.
Why You Pay So Much Interest Early On
Interest is calculated on your outstanding balance. At the start of the loan, your balance is highest — so most of your payment goes to interest. As the balance shrinks, more and more of each payment goes to principal.
On a 30-year $400,000 loan at 7%, your first payment of roughly $2,661 splits approximately like this:
| Payment # | Principal | Interest | Balance Remaining |
|---|---|---|---|
| 1 | $328 | $2,333 | $399,672 |
| 60 (yr 5) | $470 | $2,191 | $375,900 |
| 180 (yr 15) | $879 | $1,782 | $305,600 |
| 360 (yr 30) | $2,645 | $15 | $0 |
After 5 years of payments, you've paid about $159,000 in total — but only around $24,000 of that reduced your balance.
Fixed vs. Adjustable Rates
A fixed-rate mortgagelocks in your interest rate for the entire loan term. Your P&I payment never changes, which makes budgeting straightforward.
An adjustable-rate mortgage (ARM) offers a fixed rate for an initial period (say, 5 years on a 5/1 ARM), then adjusts annually based on a market index. ARMs typically start lower than fixed rates — but you take on the risk that rates rise.
How Lenders Decide What to Charge You
Your mortgage rate is based on:
- Credit score — higher score, lower rate
- Down payment — more down, lower risk to lender
- Loan-to-value ratio (LTV) — loan amount ÷ home value
- Loan type — conventional, FHA, VA, jumbo
- Market conditions — benchmarked to the 10-year Treasury yield
The True Cost of a Mortgage
The total interest on a 30-year $400,000 loan at 7% is about $558,000 — nearly 1.4× the original loan amount. This is why the choice of rate and loan term has such a large impact on your finances.
A 15-year loan at the same rate cuts total interest roughly in half — but your monthly payment is about 40% higher. Use the calculator to see exactly how these trade-offs play out for your numbers.