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The payment is not the cost

Lenders advertise the monthly payment because it is the number that fits a budget conversation. The number that matters is total interest paid, and the two move in opposite directions: extending a term lowers the payment and raises the total, often dramatically. A 300,000 loan at 6 percent costs about 216,000 in interest over 30 years and about 99,000 over 15. The monthly payment differs by roughly 700; the lifetime difference is more than a hundred thousand.

How the formula works

An amortising loan uses a level payment where the split between interest and principal shifts every month. Interest is charged on the outstanding balance, so early payments are mostly interest and late payments mostly principal. On a 30-year mortgage the balance is still around 84 percent of the original after ten years of payments. This is not a trick; it is arithmetic on a declining balance. But it explains why selling early feels like having paid nothing off.

APR versus interest rate

The interest rate prices the borrowing. The APR folds in origination fees, points and certain closing costs, expressed as an annualised rate, and it is the number to compare between offers. A loan with a lower rate and higher fees can carry a higher APR. The comparison only holds if you keep the loan to term, since front-loaded fees amortised over 30 years look cheap in APR terms and are not if you refinance in five.

Overpayment is the highest-return move available

Any extra payment goes entirely to principal, and removes all future interest that principal would have accrued. Paying an additional 100 a month on that 300,000 loan at 6 percent cuts roughly five years and about 50,000 in interest. The effective return equals the loan rate, guaranteed and tax-free in most jurisdictions, which is difficult to beat with any low-risk investment. Check for prepayment penalties first; they still exist on some products.

Fixed, variable and the risk you are taking

A fixed rate transfers interest-rate risk to the lender and you pay a premium for it. A variable rate is cheaper today and repriced later, sometimes at a schedule and cap you should read before signing. The question is not which is cheaper now but whether your budget survives the worst case the contract permits.

What this calculator does not include

Property taxes, insurance, service charges and mortgage insurance are commonly bundled into a mortgage payment and are not part of principal and interest. The full monthly cost of a home loan is routinely 25 to 40 percent higher than the figure a loan calculator returns.