How is mortgage interest calculated?

The monthly interest formula

Monthly interest = (remaining balance × annual rate) / 12

The monthly payment formula (PMT)

M = P × [r(1+r)^n] / [(1+r)^n − 1]

Where:

• M = monthly payment
• P = loan principal
• r = monthly interest rate (annual rate / 12)
• n = total number of payments (years × 12)

Worked example: $300,000 loan, 7%, 30 years

• r = 0.07/12 = 0.00583
• n = 360 payments
• M ≈ $1,996/month

First payment breakdown

• Interest: 300,000 × 0.00583 = $1,750
• Principal: 1,996 − 1,750 = $246

Payment #180 (year 15)

• Remaining balance ≈ $220,000
• Interest: 220,000 × 0.00583 = $1,283
• Principal: 1,996 − 1,283 = $713

Payment #360 (final)

• Remaining balance ≈ $1,985
• Interest: ~$12
• Principal: ~$1,984

Total interest paid over 30 years

$1,996 × 360 − $300,000 = $418,527 in interest, 139% of the loan principal.

Why extra principal payments compound

Paying an extra $100/month on a 30-year 7% loan saves about $90,000 in interest and cuts 5 years off the term, because every dollar of extra principal reduces the base on which all future interest is calculated.