question about paying off loans over a fixed time... i.e mortgage

[dionx]

whenever i see a table of monthly payments broken down between principal paid and interest paid, they are never consistent value. interest paid starts off high and gradually decreases as each month goes on, and principal paid is the converse where it starts low and slowly increases as each month goes on.

maybe i don't see how the math is involved, but whats to prevent monthly payments to be broken into fixed percentages such as 85% of the monthly payment paying the principal off and the remaining 15% paying off interest?

 

[NoReMoRsE]

Nothing's stopping you. Just make sure your constant payment is large enough to pay off the interest and a bit of the principal each period.

 

[The Sauce]

I think I know what you are asking, which is why does the lender insist on collecting a higher percentage of interest up front rather than just making the ratio of principal:interest the same over the life of the loan. And the reason is that the lender wants to make money and discourage you from prepaying on your loan. So for example if you decide to prepay on your loan to pay down your principal, then the bank still makes money since they are collecting a higher percentage of the interest up front.

 

[Ameesh]

the lenders like to get their interest up front so if you decide to refinance they will get more money because the interest goes to them and the principal goes to your property.

its a good idea when you get a mortghage to budget it so that you can afford to pay a little extra every month. the extra will go to your principal and help you pay off your mortgage faster. i am currently trying to pay as much principal as i do in interest every payment.

 

[The Sauce]

Ah Ameesh but there's the rub. If you pay off your principal sooner, as you suggest, you will not be saving that much in interest since in essence you are reducing your "later" payments, which are mostly principal and little interest anyway.

 

[Ameesh]

Originally posted by: Snatchface
Ah Ameesh but there's the rub. If you pay off your principal sooner, as you suggest, you will not be saving that much in interest since in essence you are reducing your "later" payments, which are mostly principal and little interest anyway.

true, but you will pay off your mortgage quicker, which is the u;timate goal.

 

[EagleKeeper]

You can almost cut your mortgage by a third by looking at the principla for the following month and adding that amount to the current payment.

The extra amount can drop 10 years off a 30 year mortgage with very little pain.

As it becomes a larger amount, you may have problems making the extra principla, however, every little extra is a great benifit.