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If you’re taking out a mortgage to buy a home, you’re probably already aware that you are going to pay interest in order to borrow. With each payment you make, some of the money will go toward principal while some will go toward interest.
What may surprise you, however, is how little of your monthly payment actually goes toward reducing your balance. Here’s what you need to know about how this works.
Interest eats up a good portion of most of your early payments
The amount of your monthly mortgage payment that goes toward principal changes over time — but at the start of your loan when you first begin making payments, almost all of the money goes toward interest.
There’s a simple reason for that: your monthly payments are the same for the entire life of the loan, assuming you choose a fixed-rate mortgage (which is the right choice for most people, because it provides predictability). At the beginning of the loan, you haven’t paid down any principal. You owe a huge amount of money to your mortgage lender and the interest charges on such a large sum are substantial. So, most of your money goes toward covering them.
Over many years, your balance falls due to the portion of your payment that does go to reducing what you owe. As your balance falls, the interest charged declines. So, more and more of your payment each month goes toward principal, until eventually your balance is very small and you only owe a tiny amount of interest on it.
Here’s what this can look like. Say you borrowed $400,000 using a 30-year fixed-rate mortgage with a 7.00% interest rate. You’d have a $2,661.21 per month payment for the life of the loan. And here’s how much of this payment would go toward principal versus interest every month.
| Payment | Amount to Principal | Amount to Interest | Remaining Mortgage Balance |
|---|---|---|---|
| 1 | $327.88 | $2,333.33 | $399,672.12 |
| 2 | $329.79 | $2,331.42 | $399,342.33 |
| 3 | $331.71 | $2,329.50 | $399,010.62 |
| 4 | $333.65 | $2,327.56 | $398,676.97 |
| 5 | $335.59 | $2,325.62 | $398,341.38 |
| 6 | $337.55 | $2,323.66 | $398,003.83 |
| 7 | $339.52 | $2,321.69 | $397,664.31 |
| 8 | $341.50 | $2,319.71 | $397,322.80 |
| 9 | $343.49 | $2,317.72 | $396,979.31 |
| 10 | $345.50 | $2,315.71 | $396,633.81 |
| 11 | $347.51 | $2,313.70 | $396,286.30 |
| 12 | $349.54 | $2,311.67 | $395,936.76 |
As you can see, your balance falls by a little bit from each payment you make out of your checking account. But the bulk of your money does go to cover the huge interest charges you’re paying since, simply put, paying 7.00% interest on a $400,000 balance is expensive.
You will be chipping away at your debt a little bit each month, but it will be many years until more of your money actually goes towards principal. If you made your first mortgage payment in January of 2024, it would take you until February of 2044 before a greater percentage of your payment went to principal. In that February payment, more than 20 years after you started repaying your debt, $1,331.93 would go toward principal and $1,329.28 would go to interest.
And things only get better from there. Here’s what your last year of payments would look like:
| Payment # | Amount to Principal | Amount to Interest | Remaining Mortgage Balance |
| 348 | $2,481.80 | $179.41 | $28,274.12 |
| 350 | $2,496.28 | $164.93 | $25,777.85 |
| 351 | $2,510.84 | $150.37 | $23,267.01 |
| 352 | $2,525.49 | $135.72 | $20,741.52 |
| 353 | $2,540.22 | $120.99 | $18,201.30 |
| 354 | $2,555.04 | $106.17 | $15,646.27 |
| 355 | $2,569.94 | $91.27 | $13,076.33 |
| 356 | $2,584.93 | $76.28 | $10,491.40 |
| 357 | $2,600.01 | $61.20 | $7,891.39 |
| 358 | $2,615.18 | $46.03 | $5,276.21 |
| 359 | $2,630.43 | $30.78 | $2,645.78 |
| 360 | $2,645.78 | $15.43 | $0.00 |
Should you make extra mortgage payments to reduce your principal balance sooner?
As you can see, if you just pay the minimum at the start of your loan, you won’t make progress very quickly. So, you may be tempted to make larger or more frequent payments. If you do, each extra payment you make can go directly to reducing your balance.
For most people, though, this doesn’t make a whole lot of sense. A mortgage is a pretty low interest debt (even at today’s high rates) and you can usually get a better return on investing by putting your money into the stock market. If you itemize on your taxes, you can also deduct mortgage interest on loans up to $750,000. Plus, since your payment stays the same but the value of money falls over time due to inflation, your housing costs effectively get cheaper each month.
Ultimately, it can be frustrating to see your balance fall so slowly. But that’s the nature of the loan. As long as your mortgage is affordable, it’s not something to worry about because each payment does help you build equity and make progress toward a debt-free future.
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