To calculate mortgage interest for any given month, multiply your remaining loan balance by your annual interest rate, then divide by 12. On a $300,000 mortgage at 4%, your first month’s interest would be $300,000 × 0.04 ÷ 12, which equals $1,000. That single formula is the foundation for understanding every interest charge on your mortgage statement, from your first payment to your last.
The Monthly Interest Formula
Every mortgage payment includes two parts: interest and principal. The interest portion is always based on what you still owe, not the original loan amount. Here’s the calculation:
- Monthly interest = Outstanding balance × Annual interest rate ÷ 12
If your current balance is $250,000 and your rate is 6.5%, your interest charge for the month is $250,000 × 0.065 ÷ 12 = $1,354.17. The rest of your fixed monthly payment goes toward reducing the balance (principal). Next month, you’ll owe slightly less, so the interest charge drops by a small amount and a little more of your payment chips away at the principal.
This is why mortgage interest isn’t a single fixed number you calculate once. It changes every month as your balance shrinks.
How Amortization Shifts Your Payments Over Time
Amortization is the schedule that maps out how your loan gets paid off over its full term. On a standard 30-year fixed mortgage, your total monthly payment stays the same for the life of the loan, but the split between interest and principal changes dramatically.
At the start of the loan, when your balance is highest, most of each payment goes toward interest. On a $300,000 loan at 4%, the first month’s interest is $1,000. If your total monthly payment is $1,432, only $432 goes toward principal that month. Fast-forward to the point where your balance has dropped to $193,000, and the interest portion falls to about $643. Now $789 of that same $1,432 payment is reducing your debt.
By the final years of the loan, the ratio has nearly flipped. Almost all of each payment is principal, with just a thin slice going to interest. This front-loading of interest is why extra payments early in the loan save you far more in total interest than extra payments later on.
Building Your Own Amortization Table
You can map out every payment on your mortgage using a simple spreadsheet. Here’s the process for each row (each month):
- Step 1: Calculate the month’s interest: Outstanding balance × Annual rate ÷ 12
- Step 2: Calculate the month’s principal: Total monthly payment minus the interest you just calculated
- Step 3: Calculate the new balance: Previous balance minus the principal payment
Repeat those three steps for every month of the loan. On a 30-year mortgage, that’s 360 rows. The total monthly payment itself comes from the standard loan payment formula, which accounts for the loan amount, interest rate, and number of payments. Most people use an online calculator or a spreadsheet function like PMT() to get that fixed monthly number, then use the steps above to break each payment into its interest and principal components.
Walking through even the first dozen rows reveals how slowly the balance drops at the beginning. On a $350,000 loan at 7%, roughly 70% of each early payment is interest. That can feel discouraging, but the pace accelerates as the balance falls.
How Daily (Per Diem) Interest Works
Sometimes mortgage interest is calculated on a daily basis rather than monthly. This comes up most often at closing. If you close on your loan partway through a month, your lender charges per diem interest, covering the days between your closing date and the end of that month. The formula is straightforward:
- Daily interest = (Annual rate ÷ 365) × Loan balance × Number of days
For example, if you close on a $100,000 loan at 4.75% on July 29, you owe three days of per diem interest (July 29, 30, and 31). The daily rate is 0.0475 ÷ 365 = 0.00013, and $100,000 × 0.00013 × 3 = about $39. This charge shows up on your closing disclosure as prepaid interest.
Closing earlier in the month means more per diem days and a higher upfront charge, but it also means your first full mortgage payment gets pushed out further. Closing near the end of the month minimizes prepaid interest.
Interest Rate vs. APR
When comparing loan offers, you’ll see two numbers: the interest rate and the APR (annual percentage rate). Your interest rate is the number used in the monthly formula above. The APR is higher because it folds in additional costs, like origination fees and other charges the lender collects when the loan is made. The Consumer Financial Protection Bureau defines APR as the interest rate plus those additional lender fees.
Use the interest rate when you’re calculating your actual monthly payment. Use the APR when you’re comparing the true cost of different loan offers, since a loan with a lower rate but steep origination fees can end up costing more than a loan with a slightly higher rate and no fees.
What Extra Payments Do to Your Interest
Because monthly interest is recalculated on your current balance, every extra dollar you pay toward principal immediately reduces next month’s interest charge. Even modest extra payments compound over time.
Say your balance is $280,000 at 6%. This month’s interest is $1,400. If you make an extra $200 principal payment, your new balance is $200 lower than it would have been, saving you $1 in interest the very next month. That sounds small, but those savings stack. The lower balance produces lower interest, which means more of your regular payment goes to principal, which further lowers the balance. Over 20 or 25 remaining years, a consistent extra $200 per month can shave years off the loan and save tens of thousands in interest.
To see the exact impact, rebuild your amortization table with the extra payment included each month. Compare the total interest paid in both versions, and you’ll have a precise dollar figure for the savings.
Putting It All Together
The core math never changes: balance × rate ÷ 12. Whether you’re checking your lender’s statement, estimating how much of your payment is building equity, or deciding whether to throw extra money at your mortgage, that one formula gives you the answer. Plug it into a spreadsheet, extend it across 360 months, and you have a complete picture of where every dollar goes from your first payment to your last.