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mortgage question

November 20th, 2008 at 09:23 pm

Possibly ignorant question...but people always make remarks such as "oh you are only making interest payments at this point" when you say that you made a payment on your mortgage if you are a new homeowner.

Mortgages- why is it that you are paying primarily interest in the beginning of your loan, and more principal as you pay the loan down?

I would think that if you get a mortgage for $100,000 @ 6% for 30yrs...I would think the bank divided $100,000 by 360 months (length of loan) =$277 and then charged 6.0% interest on the $277.00....but the mortgage calculator says the monthly payment is $600.00...why??

Posted in house buying process | 6 Comments »

6 Responses to “mortgage question”

  1. creditcardfree Says:
    November 20th, 2008 at 09:29 pm 1227216574
    1227216574

    You are charged interest on the outstanding loan balance. The percentage is an annual rate, so you are charged 1/12 of 6% on $100,000 for the first month. As the princial or outstanding balance goes down...so does your interest payment. The gives you a permanent payment consisting of principal and interest for the life of the loan...this never changes unless you refinance. Although, often part of your payment also includes portions for insurance and taxes and these can change from year to year thus adjusting your total payment.

    I hope that helps!

  2. merch Says:
    November 20th, 2008 at 09:32 pm 1227216741
    1227216741

    Nope. The calculation is a simple interest calculation. You take the amount outstanding multiple by the interest rate and then divide by 12.

    100,000 * .06 / 12 = 500 is th einterst piece. So if your payment was $750, $250 would go to proncipal.

    Next month:

    99,750 * .06 / 12= 498.75 would be the interest you paid the next month.

    It just happens that the bank figures at what payment will the loan be paid off in 30 or 15 years.

    Another thing is that mortgages do not use compound interest just simple interest.

    The other thing the bank usually adds to the payment is interest and taxes. They put it in an escrow account and then pay the town or insurance company.

  3. Ima saver Says:
    November 20th, 2008 at 09:34 pm 1227216892
    1227216892

    You are paying $500 a month the first month in interest and $100 on the principal. Every month you pay a few cents less interest. You need to see an amortazation chart.

  4. gamecock43 Says:
    November 20th, 2008 at 10:03 pm 1227218615
    1227218615

    ok thanks guys. Paying interest on the outstanding balance is what was throwing me off. Thanks!

  5. monkeymama Says:
    November 21st, 2008 at 12:41 am 1227228087
    1227228087

    & don't get bummed by the small payments up front. Over time, they sure do add up. ($20k over 7 years here. We used to have a 15-year loan so feels SLOW. But let me tell you, in this climate, I am quite happy to be $20k paid down over 7 years. Plus it's all starting to speed up now. Yay).

    Slow and steady wins the race, eh?

    (I know a few too many people who justified interest-only loans because "you don't pay much principle in the beginning anyway.")

  6. StressLess Says:
    November 22nd, 2008 at 01:40 pm 1227361256
    1227361256

    That's why you get so much more bang for the buck if you can make extra principal payments at the beginning of your mortgage. If you can find an amortization schedule, you'd see. When your payment is $600, $100 against principal and $500 on interest, each time you voluntarily pay an extra $100 on principal there's $500 you'll never have to pay in interest. There are a couple of books that explain this really well, How to Unscramble Your Nest Egg, and The Banker's Secret.

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