How a Home Mortgage Loans Work | Columbus Homes For Sale

How

Home

Mortgage Loans Work

Excluding property taxes and insurance, a traditional fixed-rate

home

mortgage

loans

payment

consist of two

parts: (1) interest

on the loan

and (2)

payment towards the principal, or unpaid balance of the loan.

Many people are surprised to learn, however, that the amount you pay towards interest and principal varies

dramatically over

time. This is

because mortgage loans work in such a way that the early payments are primarily in

interest, and the later

payments are primarily towards

the principal.

To help calculate monthly payments for loans based on different interest rates, lenders long ago developed what

are known as

"amortization

tables." These tables also make it fairly easy to calculate how much money of each

payment is interest, and how

much goes towards the

principal balance.

For example, let's calculate the principle and interest for the very first monthly

home mortgage loan

payment of a

30-year, $100,000

mortgage loan

at 7.5

percent interest. According to the amortization tables, the monthly

payment on this loan is

fixed at $699.21.

The first step is to calculate the annual interest by multiplying $100,000 x .075 (7.5 %). This equals $7,500, which

we then

divide by 12

(for the number of months in a year), which equals $625.

If you subtract $625 from the monthly payment of $699.21, we see that:

$625 of the first payment is interest

$74.21 of the first payment goes towards the principal

Next, if we subtract $74.21 (the first principal payment) from the $100,000 of the loan, we come up with a new

unpaid

principal balance of

$99,925.79. To determine

the next month's principal and interest payments, we just repeat the steps already described.

Thus, we now multiply the new principal balance (99,925.79) times the interest rate (7.5%) to get an annual

interest payment

of $7,494.43.

Divided by 12, this equals $624.54. So during the second month's

home mortgage

loan

payment:

$624.54 is interest

$74.67 goes towards the principal.

Note: In Canada, payments are compounded semi-annually instead of monthly.

Equity

As you can see from the above example, even though you pay a lot of interest up front, you're also slowly paying

down the

overall debt.

This is known as building equity. Thus, even if you sell a house before the loan is paid in full,

you only have to pay

off the unpaid principal

balance, the difference between the sales price and the unpaid

principle is your equity.

In order to build equity faster, as well as save money on interest payments, some homeowners choose loans with

faster

repayment

schedules (such as a 15-year loan).

Time versus savings

To help illustrate how this works, consider our previous example of a $100,000 loan at 7.5 percent interest. The

monthly

payment is around

$700, which over 30 years adds up to $252,000. In other words, over the life of the

loan you would pay

$152,000 just in interest.

With the aggressive repayment schedule of a 15-year loan, however, the monthly payment jumps to $927-for a

total of

$166,860 over the

life of the loan. Obviously, the monthly payments are more than they would be for a 30-

year

home

mortgage

loan

, but

over the life of the loan you

would save more than $85,000 in interest.

are

in mind that shorter term loans are not the right answer for everyone, so make sure to ask your lender or real

estate

agent about

what loan makes the best sense for your individual situation.

The Anders Team
614-527-0811

Real Estate Essentials for Home Buyers!

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