4 Reasons Why You Pay More Interest in the Early Years of Your Loan
Over the life of the mortgage, the amount of a mortgage payment is composed of a combination of interest and principal repayment. Initially, 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. So, why do you pay so much interest in the early years of a mortgage loan? Here are four reasons:
1. The interest owed starts to accrue from the day the loan is made.
When you deposit money at the bank, you naturally expect to start earning interest on the balance right away. It's exactly the same for lenders; they expect to earn interest on the balance as soon as they make a loan.
2. Interest diminishes along with the loan balance.
On a typical loan, you pay principal and interest each month. Over time, as you pay down the principal, you owe less interest each month, because your loan balance is lower. So, more of your monthly payment goes to paying down the principal.
3. You enjoy a fixed payment.
For a fixed-rate loan, payments are calculated to remain the same throughout the loan term. As the amount you owe in interest each month declines, you are able to pay more toward principal with the same payment amount.
4. Mortgages remain affordable.
Paying interest owed plus a small amount of principal each month in the early years of a loan contributes to affordability. If the amounts of principal and interest were equal from the beginning, the payment would be substantially higher, and fewer people would qualify.
Can you tip the scales?
Almost every loan allows you to pay extra principal with your monthly payment. While paying extra will not reduce future months’ fixed payments, it will reduce the term of your loan. If you sell or refinance before the full loan term—which most borrowers do—you will have more equity in your home than you would otherwise. You can also reduce interest payments by using a shorter term loan, such as a 20-year rather than a 30-year.
Let's Chat!
When it comes to mortgage lending, you can rely on MHQ Mortgage to provide you with the information you need to make an educated decision. So, when you're ready to shop mortgage options and need to know more about interest rates, we've got your back. Mortgage Headquarters of Missouri, Inc can get you past the pitfalls of getting a mortgage. Call us: (573) 302-9990.
Mortgage Headquarters of Missouri, Inc
4824 Osage Beach Parkway, Suite 1
Osage Beach, MO 65065
Office: (573) 302-9990
Toll Free: (888)799-1206
Fax: (636)648-9917
NMLS # 1229111
1. The interest owed starts to accrue from the day the loan is made.
When you deposit money at the bank, you naturally expect to start earning interest on the balance right away. It's exactly the same for lenders; they expect to earn interest on the balance as soon as they make a loan.
2. Interest diminishes along with the loan balance.
On a typical loan, you pay principal and interest each month. Over time, as you pay down the principal, you owe less interest each month, because your loan balance is lower. So, more of your monthly payment goes to paying down the principal.
3. You enjoy a fixed payment.
For a fixed-rate loan, payments are calculated to remain the same throughout the loan term. As the amount you owe in interest each month declines, you are able to pay more toward principal with the same payment amount.
4. Mortgages remain affordable.
Paying interest owed plus a small amount of principal each month in the early years of a loan contributes to affordability. If the amounts of principal and interest were equal from the beginning, the payment would be substantially higher, and fewer people would qualify.
Can you tip the scales?Almost every loan allows you to pay extra principal with your monthly payment. While paying extra will not reduce future months’ fixed payments, it will reduce the term of your loan. If you sell or refinance before the full loan term—which most borrowers do—you will have more equity in your home than you would otherwise. You can also reduce interest payments by using a shorter term loan, such as a 20-year rather than a 30-year.
Let's Chat!
When it comes to mortgage lending, you can rely on MHQ Mortgage to provide you with the information you need to make an educated decision. So, when you're ready to shop mortgage options and need to know more about interest rates, we've got your back. Mortgage Headquarters of Missouri, Inc can get you past the pitfalls of getting a mortgage. Call us: (573) 302-9990.
4824 Osage Beach Parkway, Suite 1
Osage Beach, MO 65065
Office: (573) 302-9990
Toll Free: (888)799-1206
Fax: (636)648-9917
NMLS # 1229111
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