Whether you have an existing mortgage, or you’re considering a home purchase for the first time, it’s good to understand how your monthly mortgage payments are calculated.
Typically, the calculation covers both repayment of the principal amount you borrowed and the interest on the loan. Sometimes, it also includes amounts for real estate taxes and insurance, which are held in an escrow account until paid by your lender. Mortgages are usually structured so that the amount paid back to the principal is low in the early years, while the bulk of your monthly payment goes to interest.
As your mortgage progresses, gradually more of your payment is applied to the principal and less toward the interest. If you’re thinking about refinancing for a lower rate, ask a mortgage specialist to explain how the new structure will affect your monthly payments and overall interest paid.