Mortgage Interest Vs. Principal Payback

When you make mortgage payments, a portion goes to interest and a portion goes towards the principal balance. All of the terms of the loan will determine how much goes towards the two categories.

Significance

The interest you pay will be far greater at the beginning of the loan. As the loan is paid down, more and more of the payment goes towards the principal balance.

Effects

If your mortgage balance is $50,000 with an interest rate of 7 percent, your interest will be $291.67 for the first month. If your mortgage payments are $310, the amount going towards principal will be $18.33. Next month, the starting balance will be $49,981.67.

Features

The interest and principal payment will add up to your mortgage payment, assuming that taxes and insurances are not also paid from your payment.

Size

The smaller your mortgage balance, the less interest you pay. You can significantly reduce the amount of interest you pay by reducing your principal balance with extra payments.

Benefits

When you refinance your mortgage, you can get a lower rate of interest, which will reduce the amount of interest you pay on a monthly basis.

References

• Investopedia.com: Understand the mortgage payment structure