How Does Mortgage Repayment Work?

A mortgage is a substantial financial commitment. For most people, their home purchase is their largest asset and most significant debt. Understanding how it works is critical to managing your finances as a new homeowner.

We’ve researched the factors that affect your mortgage payment amount and how you can manage the repayment process. We’ll cover the components of mortgage payments, such as interest, principal, and taxes, as well as the time it takes for these payments to become due.

Understanding what goes into your mortgage repayment will ensure you stay informed and are prepared for this long-term debt management.

In this guide:

What makes up a mortgage payment?

When calculating a mortgage payment, the main factors to consider are the interest rate, principal, taxes, insurance, and private mortgage insurance (PMI).

These costs will vary depending on the borrower’s credit quality, the property they’re purchasing, and the loan terms. Here’s a more in-depth look at each term:

Interest rate: This is the amount you pay per year on the loan, expressed as a percentage. It will determine the amount you pay monthly based on the principal. This can be the most significant part of the mortgage payment and may fluctuate depending on the size and length of the loan, as well as the current interest-rate market.
Principal: This is the total amount you borrowed. It’s subject to interest over the life of the loan. This amount is broken down, often into fixed monthly payments, for the duration of the loan.
Taxes: Property taxes are often calculated using the local tax rates for the property and integrated into the mortgage payments.
Homeowners insurance: This is an integral part of the total cost of the loan and helps protect the lender from losses such as fire or theft. You’ll make monthly payments to the insurance company of your choice. Any homeowner with a mortgage from a lender will likely be required to hold a homeowners insurance policy.
Private mortgage insurance: PMI is added to mortgage payments for borrowers who put down less than 20% of the purchase price. This extra insurance protects the lender if the borrower can’t make sufficient payments. These costs can range from 0.22% to 2.25% of your mortgage.

How are mortgage payments calculated?

Several factors determine the payment amount for a mortgage:

Loan amount
Interest rate
The repayment term
Fees the lender charges

The principal of the loan is the amount borrowed plus associated fees and closing costs. The interest rate, expressed as a percentage, is the portion of the loan the lender charges to provide the funds. The repayment term is the time to pay off the loan.

Using these factors, the lender can calculate the periodic payment required to repay the loan by the desired date. Let’s break down an example mortgage to see these terms in action.

A mortgage calculator is an easy way to estimate how the costs of these items affect your overall mortgage payment.

Let’s say a borrower takes out a loan of $200,000 with a loan term of 30 years at a 4.5% interest rate:

Example only
Mortgage amount	$200,000
APR	4.5%
Loan term (years)	30
Monthly payment	$1,013
Total interest paid	$164,813
Total cost of loan	$364,813

With just interest and principal, assuming no extra payments, this borrower will pay $364,813 in total over the life of the loan.

That’s before you consider factors such as homeowners insurance and property taxes, which can add thousands more over the years.

When does mortgage repayment start?

Mortgage repayment often begins as soon as you sign your mortgage contract. After that, you’ll make regular payments, often due on the first day of every month.

How long your mortgage takes to repay will depend on the loan size, the interest rate, and the repayment method you choose. Repayment periods tend to be 15 or 30 years for most mortgages. You can shorten this period by paying off the loan sooner than required.

What are mortgage repayment plans?

Mortgage repayment plans refer to the terms of repayment agreed upon between a borrower and a lender. These terms include the duration of the repayment period, the types of payments expected, and the payment amount.

Most repayment plans are structured so the borrower can pay off the mortgage in full by the end of the loan term.

The most common repayment plans for mortgages include:

Traditional fixed-rate mortgages: Fixed-rate mortgages require a fixed monthly payment for the duration of the loan term. Borrowers often have between 10 to 30 years to repay the loan, making it easier to budget payments over time.
Graduated payment mortgages: Graduated payment mortgages are a type of fixed-rate mortgage, but they operate uniquely. They have a low initial payment that increases over the loan term. These plans can minimize payment shock by offering a manageable sum that gradually increases along with the borrower’s income.
Adjustable-rate mortgages (ARM): ARMs feature an interest rate the lender periodically adjusts, often following market conditions. These loan plans can be associated with a lower initial interest rate, but the adjustable nature of the rate means payments can change throughout the loan.

When selecting a repayment plan, borrowers should consider their finances and plans, and speak to a financial advisor or loan specialist to understand the options before they make a decision.

What is my mortgage repayment schedule?

Mortgage repayment schedules provide borrowers with a timeline to repay their loans. The schedule includes:

Total loan amount
Duration of the loan
Interest rate
Amount of each monthly payment

Borrowers can view their repayment schedule by looking at their loan paperwork or by logging in to their online account with their lender.

Can you change your mortgage payment?

In certain instances, you can vary your mortgage payment depending on your loan type. If you have an adjustable-rate mortgage (ARM), the payments may adjust depending on the current market interest rate. On the other hand, a fixed-rate loan often has a regular payment.

Sometimes, you can refinance your mortgage to change the payment structure or lock in a lower interest rate. Some lenders may offer additional options to make larger payments or pay off your loan early without penalty, but you should always ask your lender first.

What if I can’t make my mortgage payments?

If you can’t make your mortgage payments, the first step is to contact your lender to discuss the situation. The lender may help you restructure your payments or put you on a revised payment plan.

In cases of long-term or permanent financial hardship, the lender may be willing to consider one of the following options:

A forbearance plan allows you to temporarily pay less or nothing toward your loan while still managing the loan.

If you can’t work out a payment plan or forbearance with your lender, you may be able to refinance your loan to reduce your monthly payments. This only works if you have a good credit score, and you’ll be on the hook for closing costs.

Suppose you’re behind on your mortgage payments. In that case, you may avoid foreclosure by selling the property or entering into a deed-in-lieu of foreclosure, where you turn over the home deed to the lender in exchange for settling the debt. From there, you can work with a HUD-approved housing counseling agency that can help you plan what to do next.

If you cease making payments altogether and make no effort to resolve the issue, your lender may take legal or collection action to get the money back, including: