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Mortgage interest

Mortgage interest is the cost of borrowing money to buy a home, calculated monthly on your remaining principal balance. Because each payment retires some principal, interest paid declines over time — and that’s why early prepayment saves dramatically more than late prepayment.

Updated May 2026 · 4 min read
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Definition

Mortgage interest is the cost of borrowing money to buy a home, calculated monthly on your remaining principal balance. Because each payment retires some principal, interest paid declines over time — and that’s why early prepayment saves dramatically more than late prepayment.

What it means

Each month, your lender computes interest as (current_balance × annual_rate / 12) and bills you for that amount plus enough principal to amortize the loan over the agreed term. On a 30-year $320,000 loan at 6.5%, your first month’s payment of about $2,022 splits into $1,733 interest and $289 principal. By year 15 it’s about even. By year 30, almost all of every payment retires principal. This is the ‘front-loaded’ pattern that makes early prepayments so impactful — every dollar of extra principal in year 1 skips 30 years of interest on that dollar.

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Formula

monthly_interest = (current_balance × annual_rate) / 12

Why it matters

Most homebuyers think of mortgage interest as a flat percentage but the actual dollar cost is non-linear. A $200/month extra payment in year 1 saves more interest over the loan’s life than the same $200/month in year 15. Mortgage-interest deductibility (capped at $750K of mortgage debt under the 2017 Tax Cuts and Jobs Act, dropping to $500K for new loans after 2025 sunset unless extended) further changes after-tax cost. The standard deduction increase in 2017 means most middle-income homeowners no longer itemize and thus get no tax benefit from mortgage interest at all.

Example

On a 30-year $320,000 loan at 6.5%, total interest paid over the loan is about $408,000 — more than the loan itself. Prepaying an extra $200/month from year 1 cuts the loan to ~22.5 years and saves about $135,000 in interest.

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Frequently asked questions

Is mortgage interest tax-deductible?

Federally yes if you itemize, but capped at $750K of acquisition mortgage debt (2017-2025 TCJA rules). Most middle-income homeowners take the standard deduction and get no benefit. State rules vary. Check your specific situation with a tax pro.

When is the best time to prepay?

Year 1 saves dramatically more than year 25. Front-loaded amortization means each dollar of extra principal in early years skips many years of future interest.

Does my interest rate change over time?

Fixed-rate mortgages: no, the rate is locked. ARM (adjustable-rate) mortgages: yes, after the initial fixed period. Most borrowers want fixed for predictability.

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