Principal & Interest, the Core Split

Every mortgage payment is actually two payments stitched together: interest, which is the cost of borrowing the money, and principal, which is the actual amount you're paying back toward what you borrowed. Even though the total payment on a fixed-rate mortgage typically stays the same every month, how it's split between the two shifts constantly.

Interest is calculated each month based on the loan's current remaining balance, not the original amount you borrowed — so as the balance shrinks, so does the dollar amount of interest charged, even at the exact same rate. Principal is simply whatever's left of the payment after that month's interest is covered.

Here's what that looks like on a $200,000 loan at a 6% fixed annual rate over 30 years, where the monthly payment works out to roughly $1,199.10. In the very first month, the entire remaining balance is still $200,000, so interest takes a large bite before principal gets anything.

Loan: $200,000 | Rate: 6% fixed | Term: 30 years
Monthly payment: ≈$1,199.10

Month 1 interest: $200,000 × (6% ÷ 12) = $1,000.00
Month 1 principal: $1,199.10 − $1,000.00 = $199.10

Each month's interest charge is calculated based on the loan's current remaining ____, not the original loan amount.

Because interest is calculated on the shrinking balance, the principal portion of each payment quietly grows every single month, even though the total payment amount doesn't change. Early payments are mostly interest; late payments are mostly principal — the next lesson on amortization walks through exactly how far that shift goes.

Why does the dollar amount of interest charged on a fixed-rate mortgage change from month to month, even though the rate itself doesn't?

On a fixed-rate mortgage, the portion of each payment that goes toward principal stays exactly the same amount every single month.