What Percent of Mortgage Payment Is Interest?
Homeowners pay mostly interest on a mortgage in the early years and the bulk of the principal is paid down in the final third of the mortgage term. A mortgage payment usually includes an escrow charge to cover property taxes and insurance along with the loan payment for principal and interest.
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Mortgage Loan Interest
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The interest on a mortgage loan is determined by the outstanding loan balance and the monthly interest rate. The monthly interest rate is the annual loan rate divided by 12. For example, a mortgage with a 6 percent rate has a monthly interest charge of 0.5 percent. A 5 percent mortgage computes monthly interest at 0.4167 percent. For any monthly payment, the amount of interest paid is the current loan balance times the monthly interest rate.
Interest Charge on Early Payments
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A homeowner with a new mortgage can quickly calculate the interest amount per payment by multiplying the monthly interest rate times the loan amount. On a $200,000 loan at 6 percent, the interest charge for the first payment will be 0.5 percent times 200,000 or $1,000. The amount of interest will decline with each payment, but the decline is slow in the early years. At the end of the first year on this loan, the interest charge has dropped to $989.
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Interest Percentage of Payments
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The monthly loan payment for a $200,000 loan at 6 percent is $1,199. Divide the $1,000 of interest into the $1,199 payment, and the interest portion of the monthly loan payment is 83.4 percent. If the payment including escrow charges is used, the portion of the payment that is interest will decline. If the total monthly mortgage payment, including escrow, on this loan is $1,450, the interest portion of the payment is 69 percent.
Rule of Thumb
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For mortgages with interest rates of 5 to 6 percent and including typical escrow charges, the interest portion of the early mortgage payments will be 60 to 70 percent of the monthly payment. If the interest rate is higher, this percentage will go up. It will take 15 to 20 years for the interest charge to drop to less than half of the monthly mortgage payment.
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