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Mortgage Interest  

When it comes to the mortgage interest that you pay each month, you may wonder how the lender can get away with charging so much each month.  This is especially the way it feels at the beginning of the term when the interest is most of the monthly payment and the principal payment is minimal.  You may wonder how they actually figure out the interest payment and what makes it the way it is. 


Your mortgage interest is determined in part by your interest rate and your repayment terms.  If you are on 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.  Basically, they are saying that in year 1, you owe $100,000 and with an interest rate of 5%, your interest is higher that year than in year 15 when you owe $60,000 - the amortization schedule will help you see how it is all broken down over the entire life of the loan on a monthly basis. 


If you decide to do mortgage refinancing, the mortgage interest will work much the same way.  For instance, if you have been in your home for 15 years and decide to do a mortgage refinance on the loan.  If you decide to have the new loan run for 20 or 30 years, you are stretching out the payments on the new balance, which will help lower the payments.  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 it adjusts, the interest rate goes up 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. 


If you are wondering how to lower the total amount of interest you will be paying during 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.  One extra mortgage payment per year which goes to the principal can cut 5 to 7 years off of a 30 year mortgage.