How a payment is split
In a fully amortized loan every payment covers the interest earned since the last payment first, and whatever is left reduces principal. Interest is charged on the outstanding balance, so early payments are mostly interest and the principal share grows each month.
Worked example
A $250,000 loan at 6% for 30 years has a payment of $1,498.88. Month 1 interest = $250,000 × 0.06 ÷ 12 = $1,250.00, so principal = $1,498.88 − $1,250.00 = $248.88. The new balance is $249,751.12, so month 2 interest falls to $1,248.76 and the principal portion rises to $250.12. Do not answer with the interest portion or with the whole payment: the full payment would be principal only on a zero-interest loan.
Interest-only and balloons
During an interest-only period no principal is repaid, so the balance does not decline. On $150,000 at 6%, the monthly payment is $150,000 × 0.06 ÷ 12 = $750, and the full $150,000 balloons at maturity. Saying nothing is due at maturity forgets that the balance never fell. A $900 payment would include principal and leave a balloon slightly under $150,000. And $9,000 is the annual interest stated as if it were monthly.
Negative amortization
Negative amortization occurs when the scheduled payment is less than the interest due, so the unpaid interest is added to principal and the balance grows. A prepayment penalty is a fee for paying off early and does not raise the balance during normal payments. A discount point buydown lowers the rate at closing and has no effect on the balance. An escrow cushion is the extra reserve the servicer may hold, capped at two months of disbursements, and is not part of loan principal.
Adjustable-rate mortgages
The index moves and the margin is fixed. The fully indexed rate = index + margin: 4.25% + 2.75% = 7.00%. On a 5/1 ARM that adjustment comes after five fixed years and then annually. Caps limit the initial, periodic and lifetime changes, and a payment cap can produce negative amortization.