Last updated May 2026
How the 30-year amortization is structured, what escrow + PMI + MIP actually do, what the TILA Closing Disclosure tells you, when refinancing actually wins, and where the math breaks for borrowers. The mechanics, end to end.
How the 30-year became the default.
Pre-1934, U.S. home loans were typically 5-10 year balloon products. Borrowers refinanced again and again. The Great Depression collapsed that system. When refis dried up, balloons came due, and millions lost homes.
The 1934 National Housing Act created the Federal Housing Administration, which standardized 25-30 year fully-amortizing fixed-rate mortgages. The product stabilized housing finance for the next 90 years.
But the structure remains: a 30-year term produces the lowest monthly payment that still amortizes, at the cost of paying more in compound interest than the original loan balance over the life of the loan. The math hasn't changed since 1934. The compound-interest exposure hasn't either.
For 22 years of a 30-year loan, you pay more interest than principal.
The 30-year amortization curve
On a $400,000 mortgage at 7% APR, your monthly payment is $2,661. In month 1, $2,333 is interest and $328 is principal. In month 132 (year 11), it's still 50/50. Only after year 22 does principal dominate.
Total interest paid over 30 years: ~$558,000. Total cost: ~$958,000 to acquire a $400,000 asset. This is unremarkable in the U.S. mortgage market. It's also the largest compound-interest exposure most consumers ever have.
Closing costs you pay upfront.
- Origination fee. 0.5-1% of loan amount. Lender's charge for processing.
- Discount points. 1% per point, optional. Pre-paid interest to lower the rate. Only worth buying if you'll stay in the home long enough to break even.
- Appraisal fee. $400-$800. Required by the lender to verify collateral value.
- Title insurance. Lender's policy ($500-$2,000) is required. Owner's policy (separate) protects you. Lenders sometimes pressure you to buy through their preferred provider, you can shop.
- Recording fees + transfer taxes. 0.5-2% of loan, varies by state and county.
- Escrow setup. 2-6 months of estimated taxes + insurance, paid at closing.
- Per-diem interest. Interest from the closing date to the end of the closing month, prepaid at the closing table.
Total closing costs typically run 2-5% of the home purchase price. On a $400K home, that's $8,000-$20,000 paid at closing, separate from the down payment.
The Closing Disclosure most homebuyers never read.
TILA + RESPA require lenders to deliver a 5-page Closing Disclosure 3 business days before closing. It's the most useful disclosure document in U.S. consumer finance. Specifically, page 5 contains:
- Total Interest Percentage (TIP): the total interest you'll pay over 30 years, as a percentage of the loan amount. Often 100%+, meaning interest exceeds principal.
- Total of Payments: the actual dollar total you'll pay over 30 years (principal + interest + MIP/PMI).
- Finance Charge: total interest + finance fees over the life of the loan.
Most borrowers focus on monthly payment and rate. The Total Interest Percentage on page 5 is where the actual cost of compound interest lives. Read it.