What is mortgage interest and how does it work?

What is mortgage interest?

Mortgage interest, also known as a “finance charge,” is the amount you pay a lender to obtain financing for a property. The interest is expressed as both a percentage — the “interest rate” or “mortgage rate” — and a total dollar amount. As you repay your mortgage, you’ll make monthly payments that cover both the loan principal (the amount you borrowed) and interest based on your loan’s amortization schedule.

How does mortgage interest work?

When you make your monthly mortgage payment, part of that payment goes toward repaying the principal and the other part covers interest. In the earliest years of the loan, most of your monthly payment goes to interest. As you continue to make payments and reduce your balance, more of the payment shifts to principal.

Mortgage interest example

Say you were to take out a 30-year mortgage for $320,000 at a fixed rate of 6.75 percent. Your monthly principal and interest payment would come to $2,076. Over that 30 years, you’d make $427,185 in interest payments.

Using Bankrate’s amortization calculator, here’s how your amortization schedule would look for the first year of your mortgage:

In your first month, when your loan balance is as big as it’ll ever be, most of your monthly payment covers interest. With each payment, a little more goes toward principal and a little less goes toward interest. That’ll continue to be the case until about 20 years into your loan. In the last 10 years of the loan, the majority of each payment goes toward principal. When you fully pay off the loan at the end of the 30-year term — a time known as “maturity” — you’ll no longer be charged interest.

Current mortgage interest rates

So far in 2025, mortgage rates are averaging 6.90 percent for a 30-year loan, according to Bankrate data.

Mortgage interest for different types of loans

While you’ll pay interest no matter your mortgage type, you can choose between a mortgage with a fixed or adjustable interest rate. Although less common, you might also choose an interest-only mortgage.

Fixed-rate mortgages

With a fixed-rate mortgage, your interest rate stays the same for the entire loan term. Your monthly principal and interest payment stays the same, as well, even as the principal and interest portions shift over time. Most mortgages in the U.S. are fixed-rate loans.

Adjustable-rate mortgages

With an adjustable-rate mortgage (ARM), your interest rate changes at preset intervals throughout the loan term, often once a year or every six months. Most ARMs come with an introductory rate for a period of time, usually the first three, five, seven or 10 years of the loan. After the introductory period, your rate will increase or decrease according to the terms of the loan, raising or lowering your monthly payment.

Interest-only mortgages

Interest-only mortgages aren’t as common as fixed- and adjustable-rate loans. With this type of mortgage, you’ll make smaller monthly payments that only cover interest for an initial period of time. This could save you some money upfront, especially if you plan to get rid of the mortgage within a few years. If you keep the loan, however, you’ll eventually need to make higher monthly payments that cover both interest and the principal you deferred paying. This could become unmanageable financially if you aren’t prepared.

APR vs. interest rate

The interest rate on your mortgage only accounts for the cost of borrowing the funds. The annual percentage rate, or APR, accounts for your mortgage interest rate and other costs, including the lender’s origination fee and any points. Like the interest rate, APR is expressed as a percentage, but because it includes these other charges, it’s always higher than the interest rate.

Your lender must disclose your loan’s APR upfront, but it’s still important to ask what the APR includes. For example, some APRs don’t include credit report or appraisal fees. Keep in mind that you can try to negotiate some loan fees, especially if you’re a well-qualified borrower.

Interest vs. principal

Mortgage interest is not the same as the principal. The principal is the dollar amount of money you’re borrowing from the lender — say $320,000 to cover the home’s price, less the down payment. In contrast, the interest is what the lender is charging you to borrow out that sum.

How to get the best mortgage rate

To increase your odds of getting the best possible mortgage rate, follow these tips:

• Improve your credit score: A good credit score shows you have a history of handling debt responsibly. Well ahead of applying for a mortgage, work to boost or maintain your score by paying your bills on time and lowering your credit utilization ratio, the amount of credit you use relative to your credit limit.
• Build your down payment savings: Lenders tend to offer better rates to borrowers who make larger down payments. To increase the amount you put down, consider automatically setting aside a portion of your income into a savings account or looking into down payment assistance programs.
• Compare rates: In general, it’s best to compare offers from at least three mortgage lenders. One study by Freddie Mac found that borrowers can save up to $1,200 a year by shopping at least four offers.
• Consider a low-credit mortgage: If your credit score isn’t as high as you’d like, you might qualify for an FHA loan. FHA loans can sometimes have a lower interest rate, by about a half a point or more, compared to a conventional loan.
• Work with a mortgage broker: A broker can help you negotiate a lower rate, and many don’t charge a fee. Look for a broker who has experience with the type of loan you’re after.
• Pay points: If you expect to stay in the home long term and not to refinance for several years, you might want to pay an additional fee, known as a point, to trim your interest rate. Each point typically costs 1 percent of the loan amount and reduces your rate by 0.25 percentage points.

FAQ

• What is a good mortgage interest rate?

  Mortgage rates fluctuate frequently, and what’s considered “good” has changed over time. For a frame of reference, the typical 30-year mortgage has historically averaged about 7.2 percent, according to Bankrate data.

• How often do mortgage interest rates change?

  Mortgage rates can change multiple times in a single day. If you find a competitive rate with a lender you like, it might be worth locking in that rate before it increases.

• Is mortgage interest tax deductible?

  Each tax year, borrowers can deduct interest paid on the first $750,000 of mortgage debt (or the first $375,000 if single or married filing separately). If you bought your home before Dec. 16, 2017, you can deduct the interest on the first $1 million (or first $500,000 if single or married filing separately). Your mortgage falls into this latter category if you were under contract on the home before Dec. 15, 2017, set to close before Jan. 1, 2018 and completed the purchase prior to April 1, 2018.

  Before you decide to itemize deductions, however, consult with an accountant or tax professional.