Understanding Your Mortgage Payments: Interest Vs. Principal

September 21, 2011

Although your periodic mortgage payments appear to be the same amount, the proportion allocated towards paying interest and paying down your balance (or principal) is constantly changing. For each mortgage payment you make, your money is first used to pay the interest on your outstanding balance and the remaining portion is used to reduce your balance.

Dynmics of principal and interest

Consider the above example of a $300,000 mortgage at 5% amortized over 30 years. The monthly payments are $1,600. In the early years of the mortgage the majority of your monthly payments go towards paying the interest portion of your mortgage. The money used to pay down the outstanding principal is only a trickle at first. As your balances reduces so does the proportion that you pay towards interest and by the end of your mortgage the majority of your money is used to pay principal with little interest expense.
Depending on your average interest rate, over a 25 or 30 year mortgage you could end up paying close to $1 for every $1 you borrow.
There are ways of saving yourself interest expense over the life of your mortgage. The key to saving money on your mortgage is to pay off the principal as fast as possible if your household budget allows it. Most mortgage lenders have prepayment privileges built into their mortgages which give you the opportunity to save your self money.

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Christopher Molder

Mortgage Broker

Christopher is a mortgage broker based in Toronto, Canada. And a son of a broker too. He’s a second generation mortgage broker. Following in his father’s steps he joined the family mortgage business straight out of university.