Wednesday, May 26, 2010

How does my mortgage payment break down?

I know that a large part of a mortgage payment goes toward the interest on the loan. So how much of what I owe on my house is interest and how much is principal? When I make my payment, it says I owe a certain amount in total. Is that the principal or the principal PLUS the interest? I'm just wondering because I read a couple articles lately that suggested that even paying an extra $100 on your monthly mortgage payment would pay off your house a lot quicker, however, I can't see that an extra $100 a month would make THAT much difference if the amount I see that I owe is all principal.



For instance, if I owe $200,000 on my loan and I pay say $1500 a month on my mortgage payment, adding another $100 a month is going to be about an extra $1200 a year. How is that going to result in any significant savings? Can someone explain this to me please? Thanks!



How does my mortgage payment break down?

Your mortgage payment always includes (1) repayment of principal and (2) interest. It may also include amounts to pay your real estate taxes, mortgage insurance, etc. To get a breakdown of this ask your lender to give you a detailed statement.



Now, let's just talk about interest and repayment of principal.



When you first start paying off your mortgage, almost all of each payment goes for interest. The reason is that the amount on which you pay interest is the full amount of the loan. A small amount of the money goes to reducing principal.



The next payment is a little different. By that time the principal has been reduced (slightly) by the amount you paid for principal reduction in your first payment. So, the interest you owe and pay is a little less. Since you pay a fixed amount each month that leaves a little more money to pay for principal reduction.



This process goes on so that -- gradually -- the amount that goes to interest gets smaller and smaller and the amount toward principal larger and larger. (All this assumes that you have a fixed-rate mortgage. With a variable-rate mortgage you also have to take into account any changes in the interest rate. But the idea is the same.)



So what happens when you pay an extra $100? ALL of it goes to reducing the principal! That is because the amount of interest you pay that month doesn't change. But the next month, your principal will be $100 LESS than if you hadn't made that extra payment. So more of that payment, even if you pay nothing extra that month, will go to reducing the principal! If you keep doing that each month the same thing happens.



The net result is that (1) your mortgage will be paid off sooner, and (2) the total amount of interest you will have paid is less.



To see how this works out in a specific case go to the calculator on the source shown below.



How does my mortgage payment break down?

First of all for a standard mortgage payment you do have both the principal and the interest included in the payment. The first payment is usually just interest but as you go long into the life of the mortgage you will be paying more of the principal. Also don't forget if you have one of those mortgage agreements the mortgage will also include something known as escrow.



Basically that is an extra amount to account for property taxes.



If you put in an extra 100 into your monthly payment then you will be reducing the overall time you would have to wait till you pay off your whole mortgage. You might want to weight this against saving for your retirement though.



There is a huge psychological benefit in paying off your mortgage early though = )



P.S Mortgage interest is tax deductable too



How does my mortgage payment break down?

When you make extra principal reductions you do not pay the interest portion of that mortgage payment. A REGULAR monthly mortgage payment(PITI-principal, interest, taxes %26amp; insurance) is still due each month. I will copy my previous answer in here:



1. Get an amortization schedule from your lender. If the payments are monthly then the schedule should have 360 lines to it.



2. Make sure the mortgage doesn't have a prepayment penalty.



3. Each line is broken down by Principal, Interest, anything else.



4. Let's assume you are going to make the very first payment on the mortgage. Write out a check for the first payment (PITI).



Go to the second payment line and look at the principal amount only. Write a check for



the principal portion of the monthly payment. In the memo section of your check write %26quot;principal reduction%26quot;. record the check#'s on the respective lines of the amortization schedule. Mail the payments. The reason for writing %26quot;principal reduction%26quot; on the check is to tell the lender the extra payment is NOT for tax escrow.



You can make as many principal reductions as you feel comfortable with. However a regular monthly payment(PITI) is still due. If this was done regularly a 30 year loan could be paid off in 15 years. If 2 extra principal payments were made a 30 year loan would be paid off in 10 years.



How does my mortgage payment break down?

It helps a whole lot to pay extra on the principal. More than you can imagine...Just make sure it is applied to reduce the principal and not applied as a future normal monthly payment. Your statement should show the amount charged as interest and the amount applied to reduce the principal. If it does not, it should. Demand they show you the breakdown if they now do not.



How does my mortgage payment break down?

Increasing the monthly mortgage payment can lead to a large reduction in the pay-down period of a loan.



As you properly noted in your question, a mortgage payment represents a %26quot;blend%26quot; of both principal repayments and interest. This split between principal and interest changes over time. For borrowers who are nearing the end of their amortization period, most of their payments will go toward principal repayment. However, for new homeowners (with a lengthy period of amortization to look forward to), most of each mortgage payment (sadly) goes toward interest.



For borrowers with a lengthy remaining amortization period, extra mortgage payments can have a significant impact on the total pay-down period of the loan. To demonstrate this, consider a $200,000 loan at 6.75% (semiannual compounding) with a 20-year amortization.



The monthly payment on such a loan would be $1,510.



For the first payment, $1,110 would be interest, and only $400 would go toward principal repayment.



If the homeowner were to increase the monthly payment by $100 (from $1,510 to $1,610 per month), the paydown period decrease from 20.0 years to 17.6 years instead.



The reason for this relates to the significant increase in the amount of principal repayed per month. For the first month, instead of repaying $400 in principal, the homeowner would be repaying $500 instead (a 25% increase).

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