30-Year Fixed vs ARM: Which Mortgage Is Better? A 7/6 ARM Case: the short version

A closer look

Why the early years are mostly interest. Each month’s interest is simply the outstanding balance × the monthly rate; whatever is left of the fixed payment repays principal. In month one of the 30-year loan above, interest is $300,000 × 0.5667% = $1,700.00, so only $1,955.78 − $1,700.00 = $255.78 reduces the balance. Because the balance falls slowly at first, interest stays high; as it falls, each payment’s interest share shrinks and its principal share grows, which in turn shrinks the balance faster. Year 1 sends $20,303 of $23,469 in payments to interest (86.5%); year 20 splits almost evenly. On this loan the principal part of a payment first exceeds the interest part at payment 239 — almost 20 years in — and half the original balance is not repaid until year 22.

Three line items on a Loan Estimate routinely confuse first-time buyers, and all three affect the real monthly and lifetime cost of a mortgage well beyond the headline interest rate.

A worked example

More from the article

■Discount points: a one-time upfront fee — one point equals 1% of the loan amount — paid to permanently lower the interest rate, often by roughly 0.25 percentage point per point (pricing varies by lender and by day).

■Private Mortgage Insurance (PMI): required on most conventional loans with less than 20% down, typically costing about $30–$70 a month per $100,000 borrowed (roughly 0.36%–0.84% a year, more with lower credit scores or smaller down payments), paid monthly, protecting the lender — not the borrower…

■Escrow: a lender-held account, funded through the monthly mortgage payment, that collects and pays property taxes and homeowners insurance on the borrower’s behalf — convenient, but it also means a jump in either bill shows up as a payment increase the following year, not as…

■Monthly payment after year 7 — $2,052.64 — $1,897.86

About FinoLib: it is my free finance education library. It runs to five volumes, from the whole-economy view in Volume I to household-level detail in Volume V, and every article is written to be read on its own, with worked numbers and primary sources behind the facts.

How the articles are built: each one opens with a plain-words explanation and a short summary, develops the idea with a worked example, and closes with a decision rule, the costliest mistake, a recap and a self-check quiz. The aim is that you can read any single article without having read the others.

Who it is for: students who want the foundations explained properly, professionals who want a precise reference they can check against primary sources, and anyone managing their own money who would rather understand the mechanism than follow a rule of thumb.

What the full article covers

The full article includes worked examples, a recap, a reveal-on-click quiz and the official sources behind every figure.