Mortgage Payment Components: Principal and Interest, Part 1

While there are a number of components involved in any mortgage situation, from mortgage rates to various mortgage programs and term lengths, the eventual goal of borrowers and lenders alike is to arrive at a simple number: A monthly mortgage payment. This is the amount borrowers pay over the life of their mortgage, and it contains a few specific areas where your money will go toward as you make payments.

At Altius Mortgage and our partners at Mortgage Ogden, we’re happy to offer a wide range of mortgage options, from first-time homebuyer programs like FHA loans to numerous options for mortgage refinancing if you’re in need. We help make things simple for our clients, including laying out all the factors that will be involved in their upcoming mortgage payment that create the final number they’re paying each month. What are these elements, and how does each impact your equity and long-term finances within the mortgage? This two-part blog will go over each important component of your mortgage payment.

Principal Balance

The simplest and most straightforward area you pay money toward in a mortgage is your principal balance, which just refers to the actual amount of the mortgage loan itself. Each mortgage payment you make should contain at least some amount of principal balance, but this amount will actually increase as the mortgage goes on – this is because you’re paying down more interest earlier on, and also means you can’t simply divide your principal by your total number of payments to know how much of it has been paid off.

Now, there are certain situations where you might be able to pay down your principal balance faster than your schedule anticipates. If you have the funds available, speak to your lender about adding a bit extra to each payment, or making an extra payment once or twice a year that can be applied fully to your principal balance. Over a period of several years, this can make a major impact.

Interest Paid

The other major component that most are well aware of in a mortgage payment is your interest, which is defined by the percentage of the total loan you’re paying as an incentive to the lender for loaning you this money. As we noted above, you’ll generally begin by paying more interest early in the mortgage, but will then pay less as the loan goes on.

As you may have guessed, shorter loans will come with higher interest rates. In addition, your rates may be higher if your loan amount is higher, or if your credit score is lower than average.

For more on the various components of your mortgage payment you’ll be paying each month, or to learn about any of our mortgage rates or home loan services, speak to the staff at Altius Mortgage today.