Your Mortgage Payment: How You Can Break it Down Step by Step

By Myles Leva


Last Updated: April 28, 2022



Many people are unsure about how a mortgage payment works. But avoiding learning about it can be hazardous to your bank account. 

At the end of the day, a mortgage is just a very long-term personal loan that includes a few expenses.

Those segments of your repayment process determine each mortgage payment you make. Let's take a look at how your mortgage payment is broken down. 



What Are the 4 Parts of a Mortgage Payment?

There are 4 expenses wrapped into mortgage payments.

1. Interest

Interest payments are baked into each repayment you make. It is paid to the lender as compensation for taking on the risk of lending you money. It’s a simple expense expressed as a percentage of the transaction.

Higher interest rates mean higher mortgage payments. Also, repayments are directed more towards repaying interest during the earlier part of the repayment process.

After principal, interest will invariably be your mortgage’s second-largest expense. Interest rates on mortgages are typically quite low. But this fact will not normally be reflected in your mortgage payments for the first few years.


2. Principal

The largest portion of a mortgage payment goes to the repayment of the principal balance. This is the exact amount taken to pay for the property. Loans are structured to have the portion being paid towards this principal start low and then grow quickly as the interest is paid back.

After the interest is paid back, the overwhelming majority of each mortgage payment goes towards the mortgage principal.


3. Taxes

Real estate and property taxes are another expense that can be made as a part of your monthly payments. These taxes are set by government agencies and used to fund local infrastructure, services, and amenities.

While taxes are calculated on an annualized basis, they can be wound into your monthly payments. The lender will divide your annual dues, collect them monthly, hold them in an escrow account, then pay them when the time comes.


4. Mortgage Insurance

Mortgage insurance payments are wrapped into monthly mortgage repayments. As with taxes, they are held in escrow accounts by lenders until the payments are due.

In addition to mortgage insurance, property insurance may be wrapped into your monthly payments. Property insurance covers you from damages resulting from issues like fire, theft, and disasters.

Not everyone will make these payments in their monthly mortgage payments. However, with a down payment of less than 20%, mortgage insurance becomes mandatory to protect the lender.


What is the formula for calculating mortgage payments?

Mortgage payment calculations are remarkably simple.

In the above formula, M is your monthly repayment, P is your principal, r is your monthly interest rate, and n is the total number of payments before maturation.

You can simply copy this formula and fill in the necessary values. Alternatively, you can use an online mortgage calculator. Mortgage calculators use the same formulas, but they will calculate your payments automatically.



How much of my mortgage payment goes to principal?

As we discussed, a larger portion of your mortgage payments goes to interest during the beginning of the repayment process. As interest is shed off your mortgage, a higher portion goes to paying back the mortgage’s principal.

With typical fixed-rate mortgages, the transition described above is very predictable. However, with an adjustable-rate mortgage, you may end up paying more in interest, and for longer.

Over the entire mortgage, your interest expenses will make up a very small portion of your repayments. By the time your mortgage is in its last year, your payments should be almost entirely towards the principal.


Mortgage Calculators

One way to know for certain how much of each payment is going to the principal is to use a mortgage calculator. Some calculators, like this one, can calculate what portion goes towards principal and interest, and at what time. Good calculators will also provide visual representations of the difference.

Your first mortgage payment will normally be the most interest-dominated payment. It’s not unusual for about two-thirds of your first payment to go towards repaying interest. But at some point between the 5th and 10th year of your mortgage, your payments will start shifting and the majority of the balance should go to principal.

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Your Mortgage Payment is Not Complicated! 

Understanding each mortgage payment helps you understand the deal your lender is providing. Even when repaying an adjustable-rate mortgage, the repayment process is fairly predictable. Namely, the portion of each payment going to each mortgage expense will be consistent.

You can easily disassemble your mortgage payments and put them back together with the mortgage payment formula. Alternatively, an online mortgage payment calculator will provide answers in seconds and give you a more visual explanation of where your money is going and when.

Photo by RODNAE Productions


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