How Does Paying Down a Mortgage Work?

When you take out a mortgage, the amount you borrow is called the principal or mortgage balance. Each month, a portion of your payment goes toward reducing the principal, while another portion covers interest charges. Interest is the cost of borrowing money, and it is how lenders make a profit on home loans.

For most homeowners, monthly mortgage payments also include additional amounts for property taxes and homeowners insurance.

The portion of your payment applied to the principal helps lower the total amount you owe, increasing your home equity over time. However, the amount applied to interest does not reduce your balance or build equity. This is why your home equity doesn’t increase by the full amount of your monthly payments.

With a fixed-rate mortgage, your total monthly payment (principal + interest) remains the same throughout the loan term. However, the distribution between principal and interest changes over time.

How Does Mortgage Amortization Work?

At the beginning of your loan term, more of your payment goes toward interest because the loan balance is still high. Only a small portion is applied to the principal. As you continue making payments, your balance decreases, which means you owe less interest. Over time, a larger share of your monthly payment goes toward paying down the principal.

By the end of your loan term, most of your payment is applied to the remaining principal. This process is called amortization, and lenders use a standard formula to ensure your loan is paid off by the end of the agreed term.

Tip:

If you’re struggling to make mortgage payments or have fallen behind, contact a HUD-approved housing counseling agency for guidance.

If you have concerns or disputes about your mortgage, you can also submit a complaint to the Consumer Financial Protection Bureau (CFPB) online or by calling (855) 411-CFPB (2372).

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