How Mortgage Interest Works: Rate, APR and the Payment Formula

Interest is charged on the balance

A typical fixed-rate mortgage charges simple interest on what you still owe, once a month:

Monthly interest = current balance × (annual rate ÷ 12)

Whatever is left of your payment after interest goes to principal and lowers the balance. Next month's interest is a little smaller, so a little more goes to principal. That process is amortization. Our amortization schedule shows it for every payment.

The payment formula

The fixed payment is the one amount that, repeated every month, brings the balance to exactly zero on the last payment:

M = P × r ÷ (1 − (1 + r)⁻ⁿ)

• P: amount borrowed
• r: annual rate ÷ 12, as a decimal (6.5% → 0.065 ÷ 12 = 0.0054167)
• n: number of monthly payments (30 years = 360)

If you want to check these numbers by hand, a financial calculator solves the same equation with its payment key, and it is handy when comparing Loan Estimates.

How the rate changes the cost

Each percentage point here moves the payment by about $200 a month and total interest by $70,000 or more. A 15-year loan at 6.5% has a payment of $2,613.32 but total interest of about $170,398, less than half the 30-year figure.

Interest rate versus APR

The CFPB describes the annual percentage rate (APR) as a broader measure of the cost of borrowing than the interest rate. The APR includes the interest rate plus certain other charges, such as points and some lender fees, so it is usually higher than the rate. Two practical rules:

• Use the interest rate to calculate your monthly payment.
• Use the APR to compare the overall cost of loans with different fee structures, keeping in mind that it assumes you keep the loan for its full term.

Both appear on the Loan Estimate, along with a total interest percentage (TIP), which shows total interest as a percentage of the loan amount.

Fixed and adjustable rates

With a fixed rate, principal and interest stay the same for the life of the loan. With an adjustable rate (ARM), the rate is fixed for an initial period and then adjusts on a schedule based on an index plus a margin, within caps. The payment formula is rerun at each adjustment using the remaining balance and months.

Some loan types allow negative amortization, where payments don't cover the interest and the unpaid interest is added to the balance. The CFPB explains that this can make your balance grow even while you pay. Standard fixed-rate loans don't work this way, and Qualified Mortgages can't have this feature.

Where rates come from

Your rate depends on market conditions and on you: credit score, down payment, loan type, term and points. For a market benchmark, Freddie Mac's Primary Mortgage Market Survey publishes weekly averages for 30-year and 15-year fixed loans every Thursday. We show the latest figures with their date on our calculators, and we never show a rate without its source and date. Only a lender's Loan Estimate tells you your own rate.

This guide is educational, not financial advice.

Common questions

Is mortgage interest paid in advance or in arrears?

In arrears. The payment you make on the first of a month generally covers interest for the previous month. That is why closing includes prepaid interest for the days left in the closing month.

Why is my APR higher than my rate?

APR folds in certain upfront costs, such as points and some lender fees, spread over the loan's life. The more fees, the bigger the gap.

Does a 15-year loan have a lower rate?

Usually. Freddie Mac's weekly survey regularly shows the 15-year average below the 30-year; our calculators show the latest dated figures.