When you take out a $400,000 mortgage at 7% for 30 years, your monthly payment is about $2,661. Over 30 years, you'll pay back $957,960 total — more than double what you borrowed. Where does that extra $557,960 go? And why does it feel like your balance barely moves in the first decade?

Amortization: Front-Loaded Interest

Every mortgage payment splits into two parts: interest and principal. The ratio between them changes every single month, and in the beginning, the bank takes the lion's share.

In month one of our $400,000 example, the breakdown is:

  • Interest: $400,000 × (7% ÷ 12) = $2,333
  • Principal: $2,661 − $2,333 = $328

You're paying $2,661 and only $328 — about 12% — actually reduces what you owe. After 12 months of payments, you've paid $31,932 and your balance has dropped by just $4,068. The bank has collected roughly $27,864 in interest.

Why Is It Set Up This Way?

Amortization is designed so the lender earns their return proportionally to the outstanding balance. Since you owe more money at the start, you pay more interest at the start. This is mathematically fair — but it means the "cost" of a mortgage is heavily front-loaded.

The formula behind every payment: M = P × [r(1+r)^n] / [(1+r)^n − 1], where P is principal, r is monthly rate, and n is number of payments.

This formula keeps the monthly payment constant even though the interest/principal split changes every month.

The Tipping Point

In our $400,000 example, the point where your payment goes more to principal than to interest happens around month 224 — roughly 18.5 years in. That's how long the bank is earning more from your payment than you are building equity.

The Power of Extra Payments

Because early payments carry so much interest, extra principal payments made early have an outsized impact. If you pay an extra $300/month from the start:

  • You pay off the mortgage in about 24 years instead of 30
  • You save roughly $90,000 in total interest
  • That's 300 extra dollars a month saving 6 years and $90k — a massive return

Even a single extra payment per year (making 13 payments instead of 12) cuts about 4 years off a 30-year mortgage.

Rate vs. Term: Which Matters More?

People often focus on the interest rate, but the loan term is just as important. Consider $400,000 borrowed at 7%:

  • 30-year term: $2,661/month, $557,960 total interest
  • 20-year term: $3,101/month, $344,240 total interest
  • 15-year term: $3,595/month, $247,100 total interest

Going from 30 to 15 years costs you $934 more per month but saves $310,860 in interest — almost a full extra house purchase.

Points and Rate Buydowns

Lenders sometimes offer "points" — you pay upfront to reduce your rate. One point = 1% of the loan value. On a $400,000 loan, one point costs $4,000 and might reduce your rate by 0.25%. The math works in your favor only if you stay in the home long enough for the monthly savings to exceed the upfront cost — this break-even point is often 4–6 years.

Before signing anything, run the actual numbers with a mortgage calculator. The difference between an informed decision and an uninformed one can be worth tens of thousands of dollars over the life of a loan.