Why does the majority of my mortgage payment start out as interest and gradually move toward mostly principal?

By Jared Coulson AAA
A:

When you make a mortgage payment, the amount paid is a combination of an interest charge and principal repayment. Over the life of the mortgage, the portions of interest to principal will change.

At first, your payment will be primarily interest, with a small amount of principal included. As the mortgage matures, the principal portion of the payment will increase and the interest portion will decrease. This is due to the interest charge being calculated off the present outstanding balance of the mortgage, which decreases as more principal is repaid. The smaller the mortgage principal, the less interest is charged. (If you have negative amortization and your mortgage is actually growing in debt, see Understanding the Mortgage Payment Structure.)

For example, let's examine a simple mortgage for $100,000 at an interest rate of 4% annually and a time to maturity of 24 years. The yearly mortgage payment is $6,558.68. The first payment will consist of an interest charge of $4,000 ($100,000 x 4%) and a principal repayment of $2558.68 ($6,558.68 - $4,000). The outstanding mortgage balance after this payment is $97,441.32 ($100,000 - $2,558.68). The next payment is equal to the first, $6558.68, but will now have a different proportion of interest to principal. The interest charge for the second payment equals $3,897.65 ($97,441.32 x 4%), while the principal prepayment is $2,661.03 ($6,558.68 - $3,897.65).

The principal portion of the second payment is about $100 larger than the first. This occurs because you've paid money towards the principal amount - lessening it - and the new interest payment is calculated on the lower principal amount. Near the end of the mortgage, the payments will be primarily principal repayments.

To learn how to start paying down your principal more quickly, see Be Mortgage-Free Faster.

RELATED FAQS

  1. What are the main categories of debt?

    Learn about the different types of debt available for consumers including secured debt, unsecured debt, revolving debt and ...
  2. Does every inquiry affect a credit score?

    Check a credit report to prevent an overabundance of hard inquiries and to obtain an overall picture of your credit score's ...
  3. What's the difference between a secured line of credit and an unsecured line of credit?

    Discover the differences between a secured line of credit and an unsecured line of credit, and why lenders treat the two ...
  4. How does refinancing my mortgage affect my FICO score?

    Learn some of the ways refinancing your mortgage could impact your FICO credit score, especially if you have held your current ...
RELATED TERMS
  1. Forbearance

    A temporary postponement of mortgage payments.
  2. Mortgage Modification

    A permanent change in a homeowner's home loan terms that makes ...
  3. USDA Non-Streamlined Refinancing

    A mortgage-refinancing option offered by the United States Department ...
  4. No-Appraisal Mortgage

    A type of home loan used for refinancing for which the lender ...
  5. No-Appraisal Refinancing

    A type of mortgage for which the lender does not require an independent, ...
  6. No-Appraisal Loan

    A mortgage that does not require an appraisal of the property’s ...
Related Articles
  1. How Our Borrowing Habits Have Changed ...
    Credit & Loans

    How Our Borrowing Habits Have Changed ...

  2. Buying A Home: Cash Vs. Mortgage
    Credit & Loans

    Buying A Home: Cash Vs. Mortgage

  3. The 4 Worst Reasons For A Cash Advance
    Credit & Loans

    The 4 Worst Reasons For A Cash Advance

  4. Steps To Buy A Home
    Home & Auto

    Steps To Buy A Home

  5. How Does A Reverse Mortgage Work?
    Retirement

    How Does A Reverse Mortgage Work?

Trading Center