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The overall interest you'll pay on your mortgage depends on the interest rate you receive, whether it's a variable or fixed rate and how long it'll take you to repay the loan. While you may refinance or move before the end of the loan's term, you can find your loan's monthly interest payment breakdown by reviewing your loan's amortization table.
How Does Mortgage Amortization Work?
Mortgages are generally fully amortized installment loans, which means you repay the loan over a fixed repayment term and your monthly payment gets split between the principal—the amount you borrowed—and interest. (Additionally, part of your monthly mortgage payment may also go toward other expenses, such as mortgage insurance, homeowners insurance and taxes.)
A mortgage's amortization table shows how this split changes over time. For example, here's an amortization table with the first four and last four payments on a $280,000 mortgage with a 30-year term and a fixed 3.25% interest rate.
| Month | Payment | Principal | Interest | Balance |
|---|---|---|---|---|
| Sept. 2020 | $1,218.00 | $459.67 | $758.33 | $279,540.33 |
| Oct. 2020 | $1,218.00 | $460.91 | $757.09 | $279,079.42 |
| Nov. 2020 | $1,218.00 | $462.16 | $755.84 | $278,617.26 |
| Dec. 2020 | $1,218.00 | $463.41 | $754.59 | $278,153.85 |
| ... | ||||
| May 2050 | $1,218.00 | $1,203.95 | $14.05 | $3,982.82 |
| June 2050 | $1,218.00 | $1,207.21 | $10.79 | $2,775.61 |
| July 2050 | $1,218.00 | $1,210.48 | $7.52 | $1,565.13 |
| Aug. 2050 | $1,569.37 | $1,565.13 | $4.24 | $0.00 |
If you have a fixed-rate mortgage, your monthly mortgage payment will be the same over the life of your loan. Initially, most of your mortgage payment will go toward interest. But as you pay down the loan's principal balance, less interest accrues and a larger portion your payment goes toward the principal. By the end, nearly the entire payment goes to paying down the principal.
With an adjustable-rate mortgage (ARM), your monthly payment may change as the interest rate adjusts. The loan can still have a set repayment term, such as 15 or 30 years, and there are estimated amortization tables. However, when your rate adjusts, your monthly payment may be recalculated, or "recast," based on a new amortizable table and the remaining loan term.
There are also mortgages that offer different payment arrangements and don't fully amortize. For example, you may make interest-only payments or relatively lower monthly payments for five to seven years, and then have to pay the entire remaining balance with one balloon payment. The arrangement can be beneficial if you plan on moving or refinancing soon, but you're also taking on a big risk if your plans fall through.
In some cases, your mortgage could also have negative amortization—when your monthly payment isn't enough to pay off the accruing interest and your balance grows. As a result, you can wind up owing more than your house is worth.
How to Calculate How Much Interest You'll Pay on a Mortgage
You can figure out how much interest you'll pay each month by looking at an amortization table for your loan. You can ask your lender for one or use an online mortgage calculator that has an option to break down your amortized payments by month or year.
When you close on your mortgage, you can also look at the fifth page of your Closing Disclosure form to see the total amount of your finance charges and the total interest percentage—the amount you pay in interest relative to the loan amount over the loan's term.
However, how much you actually pay in interest will depend on whether you repay the mortgage over the full term, refinance your mortgage or pay off the mortgage early when you sell the home.
What Factors Affect How Much Interest You'll Pay on a Mortgage?
While you may see headlines about how interest rates have climbed or fallen, the rate you read about in a news story isn't necessarily the one you'll receive on your mortgage. As with other types of loans, the rate you receive can depend on your creditworthiness and the loan's specifics.
With mortgages, the following can affect your interest rate:
- The lender: Lenders may offer different rates on their loans, which is why it's important to get several offers before choosing your lender.
- Your credit: You may be able to qualify for a mortgage with a score of 580 to 620, or lower if you can put at least 10% down. However, a higher credit score can help you qualify for the best rates on your mortgage.
- Your down payment and loan amount: Putting more money down and taking out a smaller loan can lead to lower interest rates as lenders take on less risk. Additionally, if you put at least 20% down, you don't need to pay for private mortgage insurance (PMI).
- The loan term: Choosing a shorter repayment term for your loan can also lead to lower interest rates, but your monthly payment will be higher.
- The loan type: There are different types of loans, such as conventional loans, jumbo loans and mortgages from government-backed lending programs. The loans may have different fees, insurance requirements, interest rates and minimum down payment amounts.
- Whether the loan has a fixed or adjustable rate: Adjustable-rate mortgages tend to start with a lower interest rate, but the rate can rise in the future. Fixed-rate loans can be less risky as the interest rate will never change, but the rate may start a little higher.
- Mortgage points: You may be able to make an upfront payment for discount points, which lower your loan's interest rate. Alternatively, lenders may offer you credits in exchange for accepting a higher interest rate.
How to Lower the Interest on Your Mortgage
With the above factors in mind, here are a few things you can do to help lower your interest payments when you get a mortgage:
- Improve your credit. Although it can take time, try to improve your credit before taking on a mortgage. One potentially quick way to do this is by paying down credit card debt or consolidating credit card debt with a personal loan. However, you should avoid taking on a new loan if you plan on buying a home in the near future as new debt could compromise mortgage approval.
- Save up a large down payment or buy a cheaper home. While you may want to move right away, taking more time to save up a large down payment could help you secure a lower interest rate and avoid extra mortgage insurance costs. If you can't wait, consider a less expensive home to increase the amount of your down payment relative to the home's cost.
- Choose a shorter term or variable rate. Regardless of the loan amount, a shorter term and variable rate can also help you lock in a lower interest rate. However, they both come with additional risk as it may be difficult to afford the large payments in the future.
Don't Forget About Other Expenses
While interest on a mortgage can be a significant expense, and finding ways to lower your rate can save a lot of money, don't forget about the other expenses that can come with buying a home. These may include closing costs, insurance premiums, taxes and fees. Understanding all of these, along with the interest rate, can help you determine if you can afford to buy a home.