Why do you pay more interest earlier on the mortgage?

Question

and why does the principal and interest vary over the loan period?

Answer 1

So the banks get their interest first.

Answer 2

it's called 'amortization'. You start off with the cost of your home (say it's 100,000). This is the principal. Your loan has an interest rate (say it's 5%), this is the interest.

When you first start off the principal is the highest it will be, 100,000, so the interest on that is also high (on a 100,000 at 5% the interest is $5,000 in the first year).

Answer 3

You end up paying more interest earlier on in the mortgage because it is based on the total amount owing. Principle and Interest vary as interest rates change if you are in a variable rate as opposed to a fixed rate it changes everytime interest rates do. If you are in a locked in rate it the interest rate won't change until the term is up and you need to renew it.

Answer 4

Interest is higher because the principle amount is higher. As principle is paid down, a greater portion of the payment will go to principle. To see how much of your payment is currently going to interest and principle, do the following (this assumes you are paying monthly).

Example:

Principle Balance= $100,000
Interest Rate = 8%
Monthly Payment = $1,000

If the principle balance is $100,000 and the next payment is $1,000, then:

Interest portion = ($100,000 * 8%) / 12 = $667
Principle portion = $1,000 - $667 = $333

The principle balance is reduced to $99,667.

To determine the interest and principle portion of the next payment, repeat the process; however, use the new principle balance of $99,667.

Answer 5

you pay interest based on the amount of the loan, the higher the balance of the loan the more that you will be paying in interest. as the balance of the loan goes down the ration of interest to principle will be more and more inverted till you are paying down the last payment which will be mostly all principle. this is called the amortization method and can be seen on the site below. good luck

http://www.bankrate.com/brm/amortization-calculator.asp

Answer 6

You pay interest on the amount of the outstanding loan each month. The less you owe, the less you pay.

If you get a thirty year loan, the interest amount is usually twice the principle. That's why you don't want to borrow so much money.

Answer 7

The mortgage interest is higher at first because you're paying interest on a higher amount of principle.

As the principle decreases, you pay less interest.

So, the same amount of payment will send more to the principle and less to interest later on.

Answer 8

The interest is based on the outstanding principal balance. The lower the principal balance, the lower the interest that can accrue on it.

Answer 9

Its the beauty of compound interest.

The reason you pay more interest is because you owe more money. As you pay the debt down the interest is less because the money you owe is less.