Principal and Interest: Demystifying Mortgage Payments
Learn the basics of understanding principal and interest when it comes to making payments on a mortgage loan. This post demystifies how mortgage payments work and provides an easy-to-follow explanation.
Understanding Principal and Interest Mortgage Payments
The first thing to know when it comes to mortgage payments is that they are broken down into two parts: principal and interest. Understanding the difference between principle and interest, and how they each affect your monthly payments, is essential to making informed decisions when it comes to home financing.
What is Principal?
Principal is the amount of money you have borrowed from the lender to purchase your home. Each month, part of your payment goes toward the principal, reducing your overall loan amount. When you pay off the total principal, you will no longer owe money on the loan.
What is Interest?
Interest is the amount charged by the lender for the use of the money that was borrowed. Interest is calculated as a percentage of the loan amount, and is typically higher on fixed-rate loans than adjustable-rate loans. Each month, part of your payment goes toward the interest, with the remainder applied to the principal.
How Does Principal and Interest Impact Your Monthly Mortgage Payment?
The amount of principal and interest that make up your monthly mortgage payment are determined by your loan's term (how long it will take to pay off) and your loan's interest rate (the rate at which interest is charged). In general, the longer the loan term and the higher the interest rate, the more interest you will pay each month. On the other hand, the shorter the loan term and the lower the interest rate, the more of your payment will go towards the principal each month.
Understanding the Impact of Principal and Interest
Having a basic understanding of principal and interest can help you make more informed decisions when it comes to home financing. Knowing how different loan terms and interest rates can affect your monthly payment can help you find the option that best fits your financial situation.