Why the rate is not the cost

Published 2026-09-15 · Last reviewed 2026-09-21

An interest rate is a price per year. What a loan costs you is that price, multiplied by the years, applied to a balance that falls slowly at first and quickly at the end. The rate is the number quoted, the term is the number chosen, and the second one moves the total further than most people expect.

One rate, two loans, $212,235 apart

Borrow $300,000 at 6.5 percent. Over 30 years the payment is $1,896.20 a month and the interest totals $382,633 - about 128 percent of what you borrowed, paid on top of it. Over 15 years at the same rate the payment rises to $2,613.32 and the interest falls to $170,398. The rate never changed. The gap between those two interest bills is $212,235, and the only thing that produced it was time.

Half a point is worth less than the term. At 6 percent over the same 30 years, the interest is $347,515 - a saving of $35,119. Real money, but about a third of what the term did in the comparison above.

Where the money goes first

The reason time costs so much is the order of the payments. In the first month, interest is the balance at the monthly rate: $300,000 at 6.5 percent a year is $1,625.00 in interest, against a payment of $1,896.20. Nearly all of that first payment is rent on the balance, and only the remainder reduces what you owe - so the balance falls slowly, which keeps next month's interest high. In the final year the proportions reverse, and most of each payment finally becomes principal.

That is the whole reason an amortization schedule exists as a page of its own: the shape of the balance is where the cost lives. It is also why paying early - a thirteenth payment each year, or a lump sum in year three - is worth more than the same money in year twenty: an extra dollar only saves interest if it arrives before the interest is charged.

Where these numbers come from

• The monthly-payment formula. The payment is M = P x i / (1 - (1 + i)^-n), where M is the monthly payment, P the amount borrowed, i the monthly rate and n the number of payments - the same formula every loan, mortgage and auto page on this site uses. The interest total is the sum of the payments less the principal.
• The three loans are illustrations, not averages. A $300,000 balance, a 6.5 percent rate, and 15 or 30 years. No page on this site prints a typical rate for today, because there is no such number: it depends on your credit, the collateral, the term and the lender.
• Nothing else is included. Origination fees, discount points, mortgage insurance, property tax and closing costs are separate from interest and are explained on their own pages. The comparison here is the loan itself.

What this guide does not cover

It does not tell you which loan to take. A longer term costs more in interest and less every month, and which of those matters more is a question about your income, your emergency fund and how long you expect to keep the asset - none of which is arithmetic this page can do for you. It also does not model an adjustable rate, a balloon payment, or a loan that is refinanced part way through; all three change the total, and all three have their own calculators here.

Price your own numbers in the Loan Calculator, see how the balance moves year by year in the Amortization Schedule, or put the same loan on a house in the Mortgage Calculator.

Estimates only - not financial, tax or legal advice. Read the full disclaimer.