Mortgage Payment Components: Principal and Interest, Part 2

If you’re in the home market and considering the important factors involved with a mortgage, one key element you’ll likely be interested in is what your monthly payments go toward. There are a few separate things you’ll be paying money toward as you pay down your mortgage, and understanding what these are – and how much of your monthly payments will be going toward each – is very important as you plan your finances moving into the future.

At Altius Mortgage and our partners at Mortgage Ogden, we’re here to help with this and numerous other areas of the mortgage process. We offer a huge range of home loans, including those tailored to first-time homebuyers, plus provide expertise and answers to all your most important questions. In this two-part blog series, we’ll go over all the important elements that go into a standard mortgage payment, plus some tips on how to best understand your payment schedule and plan out your long-term home finances.

Size and Term

While these are not direct components of your mortgage payment, the size and term (length) of your mortgage loan are important for a simple reason: They’re the single largest factors defining what you’ll be paying each month. The longer your term is, the lower your monthly payment will be; on the flip side, if you have the funds, you can go for a shorter term that comes with higher payments, but completes your payments far sooner and allows you full ownership of the home.

Our next several sections will dig into the specific components of your monthly payments.

Principal

Some portion of each monthly payment will be sent directly to repaying your principal loan balance, or the original amount you borrowed. This amount will begin on the lower end, with the bulk of your payments for the first few years often focused on interest (more on this in a moment); as the loan ages, however, your payments become a larger and larger percentage of principal, all the way up until you complete your final mortgage payment and own the home outright.

Interest

Interest, on the other hand, is the fee you pay the lender in exchange for the risk they take in loaning you this money. One of the single most important components of any mortgage is the interest rate, which will vary depending on your personal finances, credit history and other factors.

As we mentioned above, you pay the most interest nearer to the start of your mortgage. However, as time goes on and your principal balance shrinks due to payments you’ve made, your interest generated will also become smaller – and this allows you to make the same monthly payment as earlier in the mortgage, but to do so while sending more of the money directly toward paying down your principal.

For more on what comprises a mortgage payment, or to learn about any of our home loan services or mortgage rates, speak to the staff at Altius Mortgage today.