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Mortgage Interest  

When you take out a mortgage loan, you will pay interest each month in your monthly payment.  In fact, for the first several years of the loan, most of the payment you pay each month goes toward interest, and very little toward principal.  You may wonder how the lender gets away with charging you so much interest, and just how this mortgage interest is figured when you have obtained a loan for a new home or you have finished mortgage refinancing.   

To figure out your monthly payments, on a new mortgage loan or mortgage refinance, the interest is amortized, or spread out over the life of the loan.  Your loan may be for a term of 15, 20, or 30 years, and this is the life of your loan.  The interest is figured by your interest rate also and loan amount.  If you have a fixed rate loan with a 30 year mortgage, the interest is amortized over the life of the loan with the largest amounts of interest being paid up-front.  There is an amortization schedule that is computer generated and shows each and every month how much your total payment is, including principal and interest.  This schedule also shows how much of that payment goes toward interest to the lender and how much of it goes toward your principal to pay down what you owe on the loan.   

If you decide to do mortgage refinancing, the mortgage interest will work much the same way.  For instance, let’s say you have been in your home for 15 years and decide to do a mortgage refinance on the loan.  You originally borrowed $150,000 from the bank, but after 15 years of payments, you now only owe $100,000 on your loan.  You may decide to choose a new loan with a term of 30 years.  In this case, you are stretching out the payments on the new balance of $100,000, over 30 years.  This will lower your payments, provided the interest rate is lower than you originally had.  You are also starting over on the amortization schedule, so more of the total monthly mortgage payment will go to interest initially.  Whether you get a new loan, do a mortgage refinance, or even get a bad credit mortgage loan, you will be paying mortgage interest over a period of time with a fixed rate mortgage product. 

With an adjustable rate mortgage, you may be paying a smaller monthly payment at the beginning because you are paying the interest and a small amount of principal.  When interest rates go up, the loan adjusts, and the payment increases accordingly.  If you get an interest-only loan, your entire monthly payment will be the mortgage interest and none of it will be going to the principal.  This is not beneficial in most circumstances because you aren’t paying down the principal at all.   

If you are wondering how to cut the total amount of interest you will pay over the life of the loan, the best way is to pay extra on the principal whenever you can, which will reduce not only the amount of interest but also the length of the loan.  Even small amounts paid toward principal regularly add up and are helpful.  One extra mortgage payment per year which goes to the principal can cut 5 to 7 years off of a 30 year mortgage.  If you figure the amount of money paid in interest this can save you, it can be a lot of money.