The bottom line

A 30-year fixed-rate mortgage at typical 2026 rates means you pay roughly $2 in interest for every $1 of principal over the life of the loan. Each monthly payment is the same dollar amount, but the split between principal and interest shifts dramatically over time: your first year is roughly 80% interest, your last year is roughly 95% principal. Adding a small extra payment each month — $200 on a typical mortgage — can knock 4+ years off the loan and save $50,000–100,000 in interest. The math is simple but unforgiving; understand it before you sign.

How the monthly payment is computed

The standard fixed-rate amortization formula:

M = P × r(1+r)^n / ((1+r)^n − 1)

  M = monthly principal & interest payment
  P = loan principal
  r = monthly interest rate (annual rate ÷ 12)
  n = total number of months in the term

For a $400,000 loan at 7% for 30 years:

  • r = 0.07 / 12 = 0.005833…
  • n = 360
  • (1.005833)^360 ≈ 8.116
  • M = 400,000 × 0.005833 × 8.116 / 7.116 ≈ $2,661/month

This M is just principal & interest (P&I). The total monthly housing payment, PITI, adds property tax, homeowners insurance, HOA dues, and PMI when the LTV exceeds 80%.

Why early payments are mostly interest

Each month, the lender charges interest on the remaining principal balance for that month. In month 1 of our $400k loan:

  • Balance: $400,000
  • Interest this month: $400,000 × 0.005833 = $2,333
  • Principal this month: $2,661 − $2,333 = $328
  • New balance: $399,672

By month 360 (last):

  • Balance: $2,646
  • Interest this month: $2,646 × 0.005833 = $15
  • Principal this month: $2,661 − $15 = $2,646
  • New balance: $0

So month 1 is ~12% principal / 88% interest; month 360 is ~99% principal / 1% interest. The crossover point — where principal first exceeds interest in a single payment — happens around year 17 of a 30-year loan at 7%. Before the crossover, you're mostly renting money; after, you're mostly building equity.

The total cost of borrowing

Total interest on the $400k @ 7% / 30-year:

  • Total payments: 360 × $2,661 = $958,036
  • Less principal: $400,000
  • Total interest: $558,036

That is the price of borrowing $400,000 for 30 years at 7%. You pay back $1.40 in interest for every $1 borrowed.

At a lower rate, the picture changes dramatically:

  • 5% same loan: total interest ≈ $373,023
  • 6% same loan: total interest ≈ $463,353
  • 7% same loan: total interest = $558,036
  • 8% same loan: total interest ≈ $656,706

Each 1% rate change ≈ $90,000 in interest over 30 years on a $400k loan. This is why locking in a low rate matters so much, and why refinancing when rates drop has a payback period.

PMI and the 80% LTV threshold

If your down payment is below 20% of the home price, lenders require Private Mortgage Insurance (PMI). PMI is typically 0.3% to 1.5% of the original loan amount per year, paid monthly. On a $400k loan at the 0.5% default, that's $2,000/year or $167/month.

PMI exists to protect the lender, not you. The federal Homeowners Protection Act of 1998 mandates that the lender automatically terminate PMI when the scheduled balance reaches 78% LTV based on the original property value, and lets you request termination at 80% LTV. On the same $400k @ 7% loan starting at 90% LTV ($50k down), PMI drops automatically around year 9 of the 30-year schedule — which means you're paying ~$18,000 in PMI over those years for the privilege of having a smaller down payment.

The power of extra payments

The single highest-leverage knob most homeowners ignore: an extra monthly payment toward principal.

$200/month extra on the $400k @ 7% / 30-year loan:

  • Standard payoff: month 360
  • With $200/mo extra: payoff ≈ month 313
  • Months saved: 47 months ≈ 4 years
  • Total interest standard: $558,036
  • Total interest with extra: $455,212
  • Interest saved: ~$103,000

The math: every dollar of principal you pay early avoids the interest that would have accrued on it for the rest of the loan. Each $1 in month 1 saves you 360 months × 0.005833 = $2.10 worth of compound-interest exposure (in nominal terms). That's a very high return — equivalent to ~7% guaranteed real return, which is hard to beat in safe assets.

The US Mortgage Calculator shows the exact savings for any extra payment.

Refinance vs extra payment

When rates drop materially below your current rate, refinancing usually beats an equivalent-cost extra-payment plan. The break-even calculation:

break_even_months = closing_costs / monthly_payment_savings

If you save $200/month on your new payment and closing costs are $5,000, your break-even is 25 months. Stay in the home longer than that and the refinance wins. Move sooner and you lose money.

When rates rise above your current rate, refinancing rarely makes sense unless you're cashing out equity for a different purpose.

Should you pay off your mortgage early?

The classic FIRE-community debate. The argument for: paying down a 7% mortgage is a guaranteed 7% return, tax-equivalent (mortgage interest deduction limited post-TCJA cap of $750k of acquisition debt). Few liquid investments beat that risk-free.

The argument against: equity in your home is illiquid. Cash, retirement contributions, and brokerage funds are liquid. Optionality has value.

A defensible middle path: max retirement contributions first (especially employer match), build emergency cash, then split between accelerating mortgage and taxable brokerage. The marginal extra-payment dollar is high-return but the total stock of wealth in mortgage equity should not crowd out diversified financial assets.

Common mistakes

1. Treating biweekly “split payments” as a free trick. Some servicers offer biweekly payment plans; the trick is you make 26 half-payments per year instead of 12 monthly = 13 monthly equivalents, paying one extra payment. You can replicate this by sending $1 extra payment per year directly. Some servicers charge a fee for the biweekly option — paying yourself directly is free.

2. Assuming you'll itemize and deduct mortgage interest. Post-TCJA the standard deduction is high ($32,200 MFJ for 2026), and SALT is capped at $10,000. Most filers don't itemize. Don't buy a bigger house assuming the mortgage-interest deduction will save you taxes — for most filers, it doesn't apply.

3. Ignoring closing costs. 2–5% of the loan amount, typically. Wrap into the loan or pay cash. Either way, factor into total cost.

4. Buying ARM thinking you'll refinance later. If rates rise, you may not be able to refinance affordably. ARM works only if you have a clear plan to leave or refinance before the reset, with a backup if rates move against you.

5. Forgetting opportunity cost. A 20% down payment of $80k locked into your house is $80k not earning market returns. Over 30 years at 7% real, that's ~$609k of foregone growth. Whether home appreciation offsets that depends on your local market. The mortgage interest deduction (when applicable) and avoided rent are the offsetting positives.

Use the calculator

The US Mortgage Calculator computes monthly P&I, full PITI, the complete amortization schedule month-by-month, and the savings from any extra monthly payment. PMI is dropped automatically once scheduled LTV reaches 80%.

What this guide does NOT cover

  • Adjustable-rate (ARM), balloon, interest-only, and FHA / VA / USDA loans
  • Closing costs in detail (origination, title, recording, prepaid items)
  • Mortgage interest tax deduction (TCJA $750k cap, SALT interaction)
  • Recasting: sending a lump sum then re-amortizing the remaining balance
  • Refinance break-even worksheet in detail
  • Investment property cash-flow analysis (rental income, depreciation)
  • Foreclosure, forbearance, modification scenarios

For a mortgage decision involving real money, a HUD-approved housing counselor is free and worth a conversation alongside any lender pitch.