Where your loan payment really goes
When financing a home, almost everyone looks at exactly one number: the monthly payment. That's the wrong question. Two decisions — the amortization system and the term — swing the total cost by hundreds of thousands of dollars, and the monthly payment hides all of it. Let's open the black box.
1. What does $300,000 really cost?
You borrow $300,000 over 30 years (360 months) at 6.5% a year — a realistic mortgage rate — with a fixed monthly payment (the standard amortizing loan). How much leaves your pocket in total?
2. Fixed payment vs constant amortization
A fixed payment loan (the US standard, known as the Price system) keeps the installment flat for the whole term. Constant amortization (SAC, common in Brazil and offered by some lenders) pays down the same principal every month, so the payment starts higher and falls every month. The chart shows both — and the month when the constant-amortization payment drops below the fixed one for good.
Chart comparing the monthly payment over time under both amortization systems.
How to choose: if you can afford the higher first payment, constant amortization is almost always cheaper overall. The fixed payment exists to fit today's budget — and to let you borrow more on the same income, since lenders cap the payment at roughly a third of it.
3. Why the balance barely moves at first
This is the part that shocks people. With a fixed payment, the amount stays the same — but its composition changes radically. Early on almost all of it is interest; only a sliver is principal (what actually reduces the debt). That's why, after years of paying, your balance has hardly budged.
Stacked area chart showing how each payment splits between interest and principal.
4. The shortcut: paying a little extra
Because interest is charged on the outstanding balance, every extra dollar you pay today wipes out all the interest it would have generated for decades. It's compound interest working for you. Here's how big the shortcut is:
When you pay extra, always ask the lender to shorten the term rather than reduce the payment if your goal is to save interest — that's the option that cuts the most years of debt.
Run your own loan
Put your amount, your lender's rate and your term into the full calculator, in both systems.
Open the Loan Calculator →See also: Extra payment · Compound interest · Lesson: the 8th wonder of the world
Teaching simulation: it models interest and principal only. Real mortgages also include property taxes, homeowners and mortgage insurance, and closing costs, which raise the true cost of borrowing.