What Does My Mortgage Payment Actually Cover?
Understand the four parts of a typical mortgage payment, why the interest-to-principal split changes over time, and how to read your amortization schedule.
The Four Parts of a Mortgage Payment
Most mortgage payments cover four things, often abbreviated as PITI: principal, interest, taxes, and insurance. Principal is the portion that reduces your actual loan balance. Interest is the cost of borrowing the money. Taxes are property taxes collected monthly and held in escrow until your local government's tax bill comes due. Insurance includes homeowners insurance and, if applicable, PMI.
Your lender sets up an escrow account to hold the tax and insurance portions of your payment. When your property tax bill arrives — typically once or twice per year — the lender pays it from that escrow account on your behalf. The same happens with your homeowners insurance premium.
If you put down 20% or more, your payment may not include PMI, but it will still include the escrow components for taxes and insurance unless you explicitly opted out of escrow, which some lenders allow. Understanding what each component is and approximately how much of your payment it represents helps you see where your money actually goes.
How Much Goes to Interest vs Principal Each Month
In the early years of a mortgage, a surprisingly large portion of your payment goes to interest rather than reducing your balance. This is not a trick or a scam — it is how amortized loans work mathematically. Interest is charged on the outstanding balance each month, and when that balance is large, the interest amount is large.
On a $300,000 mortgage at 7% interest, the first monthly payment of roughly $1,996 breaks down as approximately $1,750 in interest and only $246 toward principal. By month 12, it is slightly better: about $1,748 in interest and $248 toward principal. The shift happens slowly at first.
By the midpoint of the loan — around year 15 of a 30-year mortgage — the split is closer to even. And in the final years, the vast majority of each payment goes toward principal because the remaining balance is much smaller and therefore generates much less interest.
Why the Split Changes Over Time
The reason the split shifts over time is that interest is always calculated on your current outstanding balance. Each principal payment, no matter how small, slightly reduces that balance, which slightly reduces next month's interest charge, which means slightly more of next month's payment goes toward principal. This cycle compounds slowly over decades.
Making extra principal payments, even small ones, accelerates this process significantly. An extra $100 per month on a 30-year mortgage at 7% can knock years off the loan and save tens of thousands in interest because every extra dollar of principal reduction cascades forward through all future interest calculations.
This is also why refinancing early in a loan can be beneficial. When you refinance, you are not just getting a new rate — you are also restarting the amortization calculation on whatever balance remains. On a newer loan with a larger balance, the same rate reduction saves more money in absolute dollars.
Understanding Your Amortization Schedule
An amortization schedule is a table showing every payment over the life of your mortgage, broken down into the interest and principal components. Most lenders provide this at closing, and you can generate one online using your loan balance, rate, and term.
Look at the schedule for two things. First, find the row where the principal portion finally exceeds the interest portion. This is roughly the midpoint of the loan term. Second, use the schedule to evaluate the impact of extra payments. Many online amortization calculators let you add extra monthly payments and instantly show how many months they shave off the loan.
The amortization schedule also shows you exactly how much you have paid in total interest over any given period. Many homeowners are surprised to learn that over 30 years at 7%, they will pay nearly as much in total interest as they borrowed in the first place. This number motivates early payoff strategies more effectively than any rule of thumb.