Question:
“Hi Gary, Thank you for your email. Question: Why do we pay more towards our interest than principal in our monthly mortgage payments for the first several years? Shouldn’t your payments spread evenly between interest and principal so that you can pay down your principal quicker?”
Answer:
Thanks for the question. A banker may answer this better, but I’ll give it a shot.
If you get a fully amortized loan (i.e. a loan that pays down to zero by the end of the term), every payment goes both interest and principal. So each payment reduces your loan balance. And as your loan balance goes down, the interest you owe also goes down because you’re paying interest on a smaller and smaller balance. Thus with each payment, the interest part goes down and the principal part goes up.
It’s not mathematically possible to design a loan as you’re describing. If it was, you wouldn’t be paying enough interest in the beginning and/or you’d be paying too much at the end.
Either that’s complicated or I’m making it complicated!
By the way, one way you can pay down your principal quicker is either by getting a loan with a shorter amortization period (15 years instead of 30). Another way is by making extra principal payments each month.
