 |
|
|
|
|
|
A mortgage is a long term
loan that a borrower obtains from a bank, independent
mortgage broker, online lender, or even the property
seller. The house and the land
it sits on serve as collateral for the loan.
The borrower signs documents at closing time
giving the lender a lien against the property.
If that borrower doesn't make payments as agreed,
the lender can take the home through foreclosure.
Because mortgages are such large loans, consumers
pay them off over long periods, usually 15
to 30 years. Their monthly payments gradually
whittle away the principal balance, slowly at
first then rapidly toward the end of the loan.
When escrow is used, a monthly mortgage payment is called a PITI payment. That's
because each one covers a portion of the following four costs:
1. Principal: the loan balance
2. Interest: interest owed
on that balance
3. Real Estate Taxes: taxes
assessed by different government agencies
4. Property Insurance: insurance
coverage against disasters
Borrowers can choose to pay their real estate taxes and insurance in lump sums
when they come due, rather than in monthly installments to their escrow accounts.
Depending on the kind of mortgage a borrower has, the monthly payment may also
include a separate levy for private mortgage insurance (PMI) or government
backed mortgage insurance premiums.
The breakdown of each payment changes over time because mortgages are based
on a repayment formula called amortization. This simply means the
lender spreads the interest
you owe on the mortgage over hundreds of payments so that the overall loan
is as affordable as possible.
Here's how principal and interest change over the life of a loan
| Payment number |
Principal balance |
Payment amount |
Interest paid |
Principal applied |
New balance |
| 1 |
$150,000 |
$1,048.82 |
$937.50 |
$111.32 |
$149,888.68 |
| 60 |
$142,086.93 |
$1,048.82 |
$888.04 |
$160.78 |
$141,926.15 |
| 120 |
$130,426.14 |
$1,048.82 |
$815.16 |
$233.66 |
$130,192.48 |
| 240 |
$88,851.22 |
$1,048.82 |
$555.32 |
$493.50 |
$88,357.72 |
| 359 |
$2,078.14 |
$1,048.82 |
$12.99 |
$1,035.83 |
$1,042.3 |
On a 30 year $150,000 mortgage
with a fixed interest rate of 7.5 percent, a
homeowner who keeps the loan for the full term
will pay $227,575.83 in
interest. The lender can't possibly expect that person to pay all that interest
in just a couple of years so the interest is spread over the full 30 year
term. That keeps the monthly payment at $1,048.82. However, the only way
to keep the payments stable is to have the majority of each month's payment
go toward interest during the early years of the loan.
Of the first month's payment, for instance, only $111.32 goes toward principal.
The other $937.50 goes toward interest. That ratio gradually improves over
time, and by the second-to-last payment, when we're all driving hovercars and
have colonized the moon, $1,035.83 of the borrower's payment will apply to
principal while just $12.99 will go toward interest. |
|
|
 |
|
