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Personal Finances / Buying or Selling a Home

URL:  http://boards.fool.com/each-month-you-are-paying-interest-on-what-you-10884122.aspx

Subject:  Re: Amortization Date:  5/21/1999  1:56 PM
Author:  jedilevin Number:  3746 of 127815

Each Month you are paying interest on what you owe. So if you have a $100,000 loan outstanding at a 7% annual interest rate, the first month you'll pay 7%/12*100,000 in interest = $583.33 in interest. Your payment is $665.30. That leaves $82 that goes towards principal. The next month you still have a loan of $100,000 - $82 = $99,918 outstanding. You owe interest in the amount of 7%/12*99,918 = $582.86. And so on

So where does the total payment amount come from? As I mentioned before, that amount is $665.30. It's the number you get if you ask the question: What payment made every month for 360 months has a net present value of $100,000 given an annual interest rate of 7%? Mortgage loans are loans made against your income. Lenders figure that if you have a steady income, you can make steady payments towards homeownership. So that's why mortgage loans are structured as fixed payment, fully amortizing loans.

Some lenders allow you to pay more towards principal each month by increasing your total monthly payment(that will reduce the amount of your loan outstanding, and as a result reduce the amount of interest you owe next month), but lenders always want you to pay the interest you owe on the principal outstanding. Hope this helps.
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