What Is a Mortgage?
A mortgage is a loan you take out to buy a home or other property, using that property as collateral. The lender — typically a bank or mortgage company — provides the funds upfront, and you repay the loan with interest over an agreed term, most commonly 15 or 30 years.
Each monthly payment you make (often called an EMI — Equated Monthly Installment) goes toward two things: paying off the original loan amount (the principal) and paying the cost of borrowing (interest). In the early years of a mortgage, the majority of each payment goes toward interest. Over time, this shifts — you start paying down the principal faster and building equity in your home.
The amount you borrow is the home price minus your down payment. A larger down payment means a smaller loan, lower monthly payments and — critically — less total interest paid over the life of the loan.
Principal
The original loan amount — the home price minus your down payment. This is what you actually borrowed.
Interest Rate
The annual percentage the lender charges to borrow money. Even a 0.5% difference in rate can mean tens of thousands of dollars over 30 years.
Loan Term
How long you have to repay the loan. 30-year mortgages have lower monthly payments but much higher total interest. 15-year mortgages cost more monthly but save significantly in interest.
Amortization
The process of spreading your loan payments over the term. Each payment chips away at both the interest and principal — the amortization table above shows exactly how.
The Maths
How Monthly Mortgage Payments Are Calculated
Monthly mortgage payments are calculated using the standard amortization formula, which ensures every payment is equal throughout the loan term while gradually shifting the balance from interest-heavy to principal-heavy:
M = P × [r(1+r)ⁿ] / [(1+r)ⁿ – 1]
Where:
- M = Monthly payment
- P = Principal (loan amount)
- r = Monthly interest rate (annual rate ÷ 12)
- n = Total number of payments (years × 12)
For example: A $320,000 loan at 6.5% for 30 years has a monthly rate of 0.542% and 360 payments. The result is a monthly payment of approximately $2,023.
Why does early repayment save so much? In the early months, almost all of your payment goes to interest. On the $320,000 loan above, your first payment breaks down as roughly $1,733 in interest and only $290 in principal. By year 15, this flips.
This is why making extra principal payments early in a mortgage is so powerful. Even an extra $200/month in the first few years can shave years off the loan and save tens of thousands in interest.
💡 Quick Tip
Adding just one extra payment per year on a 30-year mortgage can shave 4–5 years off the loan and save $20,000–$50,000 in interest depending on your balance.
Strategy
How to Reduce Your Total Mortgage Interest
Larger Down Payment
A 20% down payment vs 10% on a $400k home reduces your loan by $40,000 — saving $84,000+ in interest over 30 years at 6.5%.
Choose a Shorter Term
A 15-year mortgage pays $166,000 in interest vs $370,000 on a 30-year loan — saving over $200,000 on a $320k loan at 6.0%.
Improve Your Credit Score
Going from 620 to 760 can reduce your rate by 1–1.5%, saving $60,000+ over the life of a $300k loan.
Make Extra Payments
Any extra payment goes directly to principal. Even $50/month extra can save years and thousands in interest over the life of the loan.
Shop Multiple Lenders
Getting quotes from 3–5 lenders can save 0.3–0.5% on your rate. On a $400k loan that's $30,000–$50,000 over the lifetime.
Refinance When Rates Drop
If market rates fall 0.75–1% below your current rate, refinancing is typically worth the closing costs. Divide closing costs by monthly savings to find your break-even.
Rate Types
Fixed vs Variable Rate Mortgages
Fixed Rate
Your interest rate stays the same for the entire loan term. Your monthly payment never changes — making budgeting easy and predictable.
Predictable payments — immune to rate rises
Best when rates are low — you lock in forever
Easier to plan long-term finances
Typically starts slightly higher than variable
You miss out if rates fall (unless you refinance)
Best for: Long-term homeowners in low-rate environments
Variable / ARM Rate
Your rate adjusts periodically — usually after an initial fixed period (e.g. 5/1 ARM = fixed for 5 years, then adjusts annually). Payments can go up or down.
Lower initial rate = lower payments in early years
Good if you plan to sell before rate adjusts
Benefits if interest rates fall over time
Payments can rise significantly if market rates go up
Harder to budget long-term
Best for: Short-term owners or when rates are expected to fall