How Mortgage Payments Work (Principal, Interest, and PITI)

A fixed-rate mortgage payment looks like a single number, but it's doing two jobs at once: paying down what you borrowed (principal) and paying rent on the balance you still owe (interest). Understanding how those two split — and how they shift over time — is the difference between reading a loan and just paying it.

The amortization formula

The monthly principal-and-interest payment on a fixed-rate loan is set by one equation:

• M — the monthly payment
• P — the principal (amount borrowed)
• i — the monthly interest rate (annual rate ÷ 12)
• n — the number of payments (years × 12)

The formula solves for the fixed payment that pays the loan down to exactly zero over its term. That's what “amortizing” means — the balance is scheduled to reach $0 on the final payment.

A worked example

A $240,000 loan at 7% for 30 years:

Why early payments are almost all interest

Interest is charged on the remaining balance, which is highest at the start. So your first payment is mostly interest and barely touches principal:

Only about $197 of that first $1,597 reduces the loan. As the balance falls, the interest share shrinks and the principal share grows — slowly at first, then faster, until the final payments are almost entirely principal. Seeing this month by month is exactly what an amortization schedule lays out.

P&I is not the whole payment: PITI

The formula gives you principal and interest only. The payment that actually leaves your account each month — and the one a rental's cash flow has to absorb — is usually PITI:

• Principal and Interest — from the formula above
• Taxes — property taxes, often collected monthly into an escrow account
• Insurance — homeowner's or landlord's insurance, also frequently escrowed

For investment properties, HOA dues and mortgage insurance (if your down payment is under 20%) stack on top. When you screen a rental's cash-on-cash return or its monthly cash flow, it's the full PITI-plus figure — not bare P&I — that the rent has to cover.

What moves the payment most

• Rate. Because of compounding, small rate changes move the payment more than most people expect — and move the total interest paid far more.
• Term. A 15-year loan has a much higher payment than a 30-year but costs a fraction of the lifetime interest.
• Extra principal. Any payment above the scheduled amount goes straight to the balance, which shortens the loan and cuts total interest — a lever an amortization schedule makes visible.