Mortgage Interest

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Mortgage Interest is the amount that you pay the bank for loaning you the money to purchase your home. The amount of interest you pay is determined by the amount of your loan and your interest rate. You will pay interest every month as part of your mortgage payment.

During the first few years, most of your payment goes to interest. Only a few dollars a month goes to decrease your principal. However, as the years roll by, less and less of the payment will go towards interest. That means, more and more of your payment will go to decrease your principal and pay off your house. Let’s extend the example from the previous section.

• You borrow a total of $196,000.

• Let’s say you have an interest rate of 6%.

• Based on a 6% interest rate, the principal and interest part of your monthly payment will be $1175.12.

Notice I said “the principal and interest PART of your payment…” Remember that your monthly payment has several “parts” that make up the total. The $1175.12 is your monthly principal and interest payment. There will be other parts added on. We will go into those later.

• In the first year of your loan, you will only pay down the principal by about $2400. After making 12 payments, your principal (remember, that’s the amount you still owe the bank) will be $193,593.09. That means during your first year of making payments to your bank/lender, you will have paid $11,694.53 in interest—A LOT more interest than principal. In the early years of the loan, the lion’s share of your payments goes to the bank for interest.

• You will have to pay on that loan for 17 years before you reach the “half and half point”–meaning an even half of the payment goes to principal and half goes to interest (about $560 to each if we use our example of $1175.12 per month). After that, the game swings in your favor and most of your payment goes towards principal. But 17 years is a long time.

• You can speed up the process and save thousands in interest by making extra principal payments. Anytime you make a payment that is more than your set monthly payment, the extra will be applied to the principal (unless you owe for late charges and/or late payments).

• If you make one extra payment every year and apply it to the principal ($1157.12, if we use our example), you can just about cut your 30 year mortgage in half. To make it easier on your budget, just divide your normal monthly payment by 12 and add that amount to each house payment. That will be the same as making one extra payment a year. The more principal you pay, the more equity (dollar amount of ownership) you acquire in your home. Using our example of $1157.12 (divided by 12), you would need to pay an extra $95 per month. Think of the interest you would save!!!

Most of us don’t have the financial discipline to do what it takes to pay off our mortgage early. And sadly, most people never pay on their loans long enough to even reach the “half and half point. But every little bit helps. Twenty dollars extra a month will make a big difference for most people without stretching the budget too far.

Or be creative.

I’m not a real “gift” oriented person, so I asked my husband to make an extra principal payment on our mortgage every year when my birth month rolls around. Not particularly romantic, I know—but hey, it works for us. Ok, we’ve covered interest—you pay it every month in your mortgage payment, and you pay A LOT of it–pretty simple so far, huh?

Posted On:  August 18, 2016
Posted By:  admin
Posted In:  Finance