How to Calculate Mortgage Principal & Interest

When you begin paying a mortgage, you're usually paying a fairly big portion in interest payments. Later in the life of the loan, you'll usually pay a smaller amount in interest, since there will be less loan balance to incur those interest charges. You can calculate the portion of mortgage principal and interest by knowing your monthly interest rate and the balance on the loan.

When you take out a mortgage loan to buy a home or pretty much any other type of commercial loan, the financial institution you're borrowing from isn't lending to you out of the goodness of its heart. The bank or other institution is looking to make money, and that comes from charging you interest, which is almost always proportional to how much you have outstanding on the loan.

The initial loan amount is called the principal of the loan, and each monthly payment you make on your mortgage will include a portion paying interest and a portion paying principal. Generally with a fixed-rate mortgage, you will pay the same payment amount over the course of the loan.

Early on after you take out the mortgage, a large portion of your payments each month will be interest because there is still a lot of principal remaining on the loan to incur interest. As you gradually pay off the loan, a greater portion of each month's payment will be principal.

You may be able to see a breakdown of how much you're paying in interest and principal on your mortgage statement or through your lender's online banking site. If you don't see it, you can use a relatively simple formula to calculate the number yourself.

Take your total outstanding balance on your mortgage (or any other loan). Then, take your annual interest rate and divide by 12 to find your monthly interest rate, since there are 12 months in a year. Multiply the balance by the monthly rate to find your current monthly interest payment.

Subtract the monthly interest payment from your total monthly payment. Also subtract any special amounts paid for things like property tax, homeowners' insurance or other costs. The rest of your monthly payment is the principal.

For example, if you owe $200,000 on your mortgage and your annual interest rate is 6 percent, or 0.06, your monthly interest rate is 0.5 percent or 0.005. Multiply $200,000 by 0.005 to get $1,000. If your total monthly payment is $1,500, you know that $1,000 is going to interest and the other $500 is going to principal.

You can find mortgage calculator tools on many banking and financial information websites that will do these computations for you, such as this loan amortization calculator from Credit Karma. You'll normally just have to plug in your total balance, interest rate and monthly payment to find how much is going to interest. Some calculators may also tell you how much you will pay in interest over the life of the loan and how much you can save by paying more than your required monthly payment.

Remember that some loans have prepayment penalties if you pay them early, so make sure you understand the particular terms of your loan.

Some mortgages have adjustable rates, meaning they fluctuate over the life of the loan in accordance with prevailing interest rates. You can use the current rate and payment to figure out how much you're paying in interest during a particular month, but make sure to use the up-to-date rate. The amount you pay each month may vary with an adjustable-rate mortgage.