How does paying down a mortgage work?

Short answer

Each monthly payment splits between (the balance you borrowed) and interest (the charge for borrowing). Principal payments reduce what you owe and build equity; interest does not. On a typical fixed-rate loan the combined principal-and-interest amount stays level, but the split changes over time.

Full explanation

The amount borrowed is the principal, also called the mortgage balance. Part of each payment reduces that balance. Another part pays interest. The monthly amount sent to the mortgage company typically includes principal and interest and often also includes taxes and insurance when those amounts are collected through an escrow account.

Only the principal portion lowers the debt and builds equity. Interest does not. That is why equity grows more slowly than the sum of payments you have made.

On a typical fixed-rate loan, the scheduled principal-and-interest amount stays the same, but early payments are mostly interest because the balance is high. As the balance falls, more of each payment goes to principal. That shifting split is . Lenders use a standard formula so the scheduled payments pay the loan off at the end of the term if you make them as agreed.

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