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. See how interest rates can fluctuate based on the principal by using the mortgage calculator below.

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 responsibilities of the principal in a company?

    Learn to differentiate between some of the many definitions and responsibilities of a "principal" as it relates to business ... Read Answer >>
  2. What are the pros and cons of a simple-interest mortgage?

    Learn the difference between a simple interest mortgage and a standard mortgage, along with their relative advantages and ... Read Answer >>
Related Articles
  1. Personal Finance

    Understanding the Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  2. Personal Finance

    Ways to Be Mortgage-Free Faster

    Getting rid of this debt faster has bigger benefits than you might think.
  3. Investing

    Understanding The Mortgage Payment Structure

    While a mortgage’s size and term set the baseline, the interest, taxes and insurance all influence the amount of the monthly payment.
  4. Personal Finance

    How Interest Rates Work On A Mortgage

    A step-by-step explanation of the interest calculations, mortgage types, and how the loan is eventually "retired" – which means paid off.
  5. Personal Finance

    How to Use a Mortgage Calculator to Save Time and Money

    Calculate your monthly mortgage payment using the Investopedia's free calculator.
  6. Taxes

    Creating a Tax-Deductible Canadian Mortgage

    Find out how to get a tax benefit from your mortgage like your neighbours to the south.
  7. Personal Finance

    Make A Risk-Based Mortgage Decision

    Find out how to choose which mortgage style is right for you.
  8. Personal Finance

    Mortgages: Fixed-Rate Versus Adjustable-Rate

    Both of these have advantages and disadvantages depending on your financial needs and prospects.
RELATED TERMS
  1. Interest Due

    The portion of a current mortgage payment that is comprised of ...
  2. Mortgage Accelerator

    A type of mortgage loan program popular in the United Kingdom ...
  3. CMG Plan

    A mortgage plan in which a borrower's mortgage is structured ...
  4. Servicing Fee

    A percentage of each mortgage payment made by a borrower to a ...
  5. Home Mortgage

    A home mortgage is a loan given by a bank, mortgage company or ...
  6. Reverse Mortgage Initial Principal Limit

    The amount of money a reverse mortgage borrower can receive from ...
Trading Center