How is mortgage interest calculated each month?

Mortgage interest is calculated monthly by multiplying your remaining loan balance by the daily interest rate, then multiplying by the number of days in that month. For a $300,000 loan at 6.43% APR, the first month's interest is roughly $1,607 — even though your total payment is around $1,845.

Why does my mortgage payment stay the same but the interest portion goes down?

Fixed-rate mortgages are amortized: your total monthly payment is mathematically fixed for the life of the loan, but every payment is split between interest and principal. Early on, most of your payment goes to interest. As your balance shrinks, the interest portion decreases and more goes to principal.

What is amortization in simple terms?

Amortization is the process of spreading a loan into equal payments over time. Each payment includes interest on the remaining balance plus a slice of principal. An amortization table shows exactly how much of each payment goes to interest vs. principal over the loan's lifetime.

Does paying extra principal reduce future interest?

Yes. Any extra payment goes 100% to principal (since the scheduled interest is already covered). Reducing the principal balance means future interest calculations are based on a smaller number, so you save on total interest and can pay off the loan years earlier.

How does the interest rate affect my monthly payment?

Each 1% change in rate changes the monthly payment by roughly 5–8% on a 30-year fixed mortgage. A $300,000 loan at 6.43% has a monthly payment around $1,845; at 7.43% it jumps to about $2,175.

How Is Mortgage Interest Calculated? (2026 Formula + Real Examples)

Mortgage interest is calculated monthly using a simple amortization formula. We break down the math, show real 2026 numbers, and explain why your payment stays the same but the interest/principal split changes.

The basic monthly mortgage formula

Unlike some loans that compound interest continuously or weekly, most mortgages use simple interest calculated monthly on your outstanding balance. This means each month’s interest depends only on that month’s remaining loan amount.

The Two-Step Process

1. First, calculate your monthly interest charge: $$I_m = P \times \left(\frac{r}{12}\right)$$

Where:

$P$ = your outstanding principal balance at the start of the month
$r$ = annual interest rate as a decimal (e.g., 6.8% = 0.068)

2. Then, use the standard amortization formula to calculate your fixed monthly payment: $$M = P \times \frac{i(1+i)^n}{(1+i)^n - 1}$$

Where:

$i$ = monthly interest rate ($r/12$)
$n$ = total number of monthly payments ($years \times 12$)

Important: For a fixed-rate mortgage, your monthly payment ($M$) stays the same throughout the life of the loan, but the split between interest ($I_m$) and principal changes every month.

How compounding actually works in a mortgage

In mortgages, interest is not compounded. Your loan uses the principal balance from the previous month, not the balance plus previously accrued interest.

This creates a snowball effect: as you pay down principal, each month’s interest charge is calculated on a smaller amount, leaving more room in your fixed payment for principal reduction.

Think of it like this: Your lender charges you interest on the money you still owe, not on money you’ve already paid off. Each month, a portion of your fixed payment goes to interest first (to cover the borrowing cost), and what’s left pays down the principal.

Fixed-rate vs. adjustable-rate: what changes

Fixed-Rate Mortgages: The interest rate and payment stay constant for the entire loan term. The formula above applies each month with the same variables.

Adjustable-Rate Mortgages (ARMs): The same monthly calculation applies, but the interest rate ($r$) changes periodically. For example, a 5/1 ARM stays at 6.8% for the first 5 years, then adjusts annually based on market rates plus a margin.

When an ARM adjusts, your payment is recalculated using the new interest rate, and your loan restarts the amortization process from the new balance.

Real 2026 example: $300,000 at 6.43% over 30 years

Based on current Freddie Mac PMMS data, the average 30-year fixed mortgage rate in July 2026 is 6.43%. Let’s break down what this means for a $300,000 loan.

Step 1: Find Your Monthly Rate

$$i = \frac{0.0643}{12} = 0.0053583 \text{ (or } 0.53583\text{%)}$$

Step 2: Calculate Your Fixed Monthly Payment

$$M = 300,000 \times \frac{0.0053583(1.0053583)^{360}}{(1.0053583)^{360} - 1}$$

$$M = 300,000 \times \frac{0.0053583 \times 46.868}{46.868 - 1} = 300,000 \times 0.00615 = $1,844.66$$

Your fixed monthly payment is approximately $1,844.66

Month 1: The Starting Point

Interest charged: $$I_1 = 300,000 \times 0.0053583 = $1,607.49$$ Principal paid: $$1,844.66 - 1,607.49 = $237.17$$

Year 1 Summary

Interest paid: $19,233.88
Principal paid: $2,846.04
Remaining balance: $297,153.96
How much went to interest: 87% of your payments

Year 15 (Midpoint)

Interest paid: $11,582.37
Principal paid: $13,667.63
Remaining balance: $132,486.47
How much went to interest: 61% of your payments

Year 25 (Final Years)

Interest paid: $3,223.52
Principal paid: $26,776.48
Remaining balance: $9,411.02
How much went to interest: 6% of your payments

Why your interest portion shrinks every year

The math is simple: interest is calculated on your remaining balance. As your balance decreases, so does the interest charge, leaving more of your fixed payment to go toward principal.

Month 1 to Month 2:

Balance dropped from $300,000 to $299,658.96
Interest fell from $1,700.01 to $1,696.52 ($3.49 less)
Principal increased from $341.04 to $345.00

This creates a self-reinforcing cycle: as interest payments decrease, principal payments increase, causing the balance to drop faster, which reduces future interest even more.

How extra payments change the math

Because interest is calculated on your remaining balance, any extra payment goes straight to principal, creating a chain reaction:

Example: If you pay an extra $200 per month starting from Month 1:

Your principal drops faster ($341.04 + $200 = $541.04 in Month 1)
Future interest calculations use the lower balance
More of each subsequent payment goes to principal
You’ll pay off the loan 5 years earlier and save over $100,000 in interest

The future interest savings compound because the reduced balance affects every month going forward. Even small extra payments create significant savings over time.

Common mistakes people make with mortgage interest

Ignoring the total interest cost: A $300,000 loan at 6.8% costs $694,496 in interest over 30 years—nearly twice the loan amount!
Focusing only on monthly payments: Paying $1,956.93 per month for 30 years costs $704,496 total. Even a 1% rate reduction saves over $100,000.
Not accounting for PMI: With a 10% down payment, most borrowers pay $100-$200/month in PMI until they reach 20% equity.
Missing tax implications: Mortgage interest is tax-deductible up to certain limits, but property taxes and other deductions phase out at higher incomes.
Assuming all loans are the same: Some loans like interest-only or balloon-payment loans have completely different interest calculation methods.

Stay informed about current rates. According to the Freddie Mac PMMS, rates can change quickly based on market conditions.

Try our mortgage calculator

Use our interactive mortgage payment calculator to visualize how interest and principal break down over time with different scenarios. You can explore extra payment effects, rate changes, and payoff strategies.

Also try our amortization calculator for detailed payment schedules and see exactly how each payment splits between interest and principal.

For a broader view of home affordability, check out our mortgage affordability calculator to understand what loan amounts you qualify for based on your income and debt levels.