Mortgage Payments: Why Are Mortgage Payments Mostly Interest?

Mortgage payments

Each mortgage payments you make represent the combination of interests and principal loan installments. The ratio of interest to principal balance will change over the life of a mortgage. Here is how that works.

How do the mortgage interest rate payments work?

Your monthly installment remains the same for the life of the loan (which might be 10, 20, or 30 years) with a traditional fixed-rate mortgage.

Initially, your mortgage payments will go towards the interest, with a small amount credited to the principal balance. The principal part of the payment will steadily increase, and the interest portion will decrease over months and years. This is because the interest charges are based on the mortgage loan’s outstanding balance at a specific period, and the balance decreases as more principal loans are repaid. Therefore, the lower the amount of your mortgage, the less interest you will pay at the end of the year.

This process is referred to as amortization. Your lender will provide you with a repayment schedule that includes interest and principal from the first to the last monthly payments when you apply for a mortgage.

Example of a mortgage interest rate that changes over time

To represent how amortization works, consider a traditional fixed-rate mortgage of $100,000 with an annual interest rate of 2% and a maturity of 30 years.

For a 30-year fixed-rate mortgage, assume a monthly mortgage payment of $369.62.

The first repayment would include an interest rate of US$166.67 and principal repayment of US$202.95. So the outstanding mortgage balance after this payment will be US$99,797.05.

The next payment is the same as the first, at 369.62 USD, but with a different interest-to-principal ratio. The interest credit for the second payment will be $166.33, while $203.29 will go toward the principal loan.

By the time of the last mortgage payment, 30 years later, the breakdown will be 62 percent for interest and $369 for the principal. This example applies to a standard, fixed-rate mortgage. In addition, you may use a more significant portion of the monthly payment to pay interest upfront and use a smaller portion over time if you have a variable-rate or adjustable-rate mortgage. However, the monthly repayment amount will also be adjusted regularly based on borrowers’ current interest rates and loan terms.

There is also a less common type of home mortgage, called an interest rate mortgage. With interest-only mortgages, all your mortgage payments will transfer to interest instead of principal for a certain period.


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