How Mortgage Payments Work: The Basics You Need to Know
Mortgage payments are one of the most important aspects of a home loan. But for many people, they are also one of the most confusing. This is because there are a few different parts to mortgage payments: the interest, the principal, and the amortization. In this article, we will break down each part of the mortgage payment so that you have a better understanding of what you're paying each month.
Variable vs Fixed
The first thing you need to understand about mortgage payments is that they can be either fixed or variable. Fixed mortgage payments stay the same for the entire length of the loan, while variable mortgage payments can change from month to month. most people opt for a fixed rate because it makes budgeting easier.
For example, let's say you have a $100,000 mortgage with a 4% interest rate. over the course of 30 years, your monthly payments would stay the same at $477.42.
And while your monthly payments would be the same, the amount that is applied to the interest and principal will change. In the beginning, more of your payment will go towards interest because you owe more money on the loan.
But as you continue to make payments, more and more of your payment will go towards the principal because you will owe less money on the loan.
This is why it's important to understand how mortgage payments work. By understanding the different parts of your payment, you can better plan for your financial future.
Interest
The interest portion of your mortgage payment is the fee that you pay to borrow money from the lender. This fee is calculated as a percentage of the total loan amount and is paid each month, along with the principal.
The interest rate on your mortgage can be either fixed or variable. Fixed interest rates stay the same for the entire length of the loan, while variable interest rates can change from month to month.
Suppose you have a $100,000 mortgage with an interest rate of 5%. That means your monthly interest payment would be $500.
If you make the minimum monthly payment on this mortgage, it will take you 240 months, or 20 years, to pay off the loan. In addition, you will end up paying a total of $93,639 in interest over the life of the loan.
If you make additional payments towards the principal each month, you can pay off your mortgage more quickly and save on interest. For example, if you make an extra payment of $100 each month, you would pay off your mortgage in 217 months, or just under 18 years. You would also save $17,146 in interest.
Principal
The principal is the portion of your mortgage payment that goes towards paying off the actual loan amount. This portion of the payment is not interest, but it is still important because it reduces the amount of money you owe on your home.
Amortization
Amortization is the process of slowly paying off a loan over time. With each mortgage payment, a portion of the principal is paid off until the entire loan amount has been repaid. The amortization schedule is the timeline that outlines when the loan will be fully paid off.
Final Thoughts
Mortgage payments can be confusing, but it's important to understand all the different parts. With this knowledge, you can make sure that you're budgeting correctly and that you're on track to pay off your loan. And, if you ever have any questions, be sure to ask your lender. They'll be more than happy to help.