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Monthly payment is calculated using the standard amortization formula: M = P × [r(1+r)ⁿ] / [(1+r)ⁿ−1], where P is the principal, r is the monthly interest rate (annual rate ÷ 12), and n is the number of monthly payments. This formula gives a fixed payment that covers both interest and principal over the loan term.

Amortization is the process of spreading loan repayments over time so that each fixed payment covers the accrued interest first, with the remainder reducing the principal balance. Early payments are mostly interest; later payments are mostly principal. An amortization schedule shows exactly how each payment is allocated.

Even a small change in interest rate significantly affects total cost over the life of a loan. For example, on a $300,000 mortgage over 30 years, the difference between a 6% and 7% rate is roughly $200 per month and over $70,000 in total interest paid. Shopping for lower rates can save substantial money.

The interest rate is the cost of borrowing the principal alone. APR (Annual Percentage Rate) includes the interest rate plus most loan fees (origination, broker, and other costs), expressed as a yearly rate. APR provides a more complete picture of the true cost of a loan for comparison purposes.

Yes. Making extra principal payments reduces your outstanding balance, which reduces future interest charges and shortens the loan term. However, some loans include prepayment penalties — check your loan agreement before making extra payments. Even small additional monthly payments can save thousands over the life of a mortgage.