## Absolute Realty Group, LLC

107 N. Line Drive
Apopka, FL 32703
Phone: (407) 673-1400
Fax : (407) 673-1401

## How Mortgage Loans Work

Excluding property taxes and insurance, a traditional fixed-rate mortgage payment consist of two parts: (1) interest on the loan and (2) payment towards the principal, or unpaid balance of the loan.

Many people are surprised to learn, however, that the amount you pay towards interest and principal varies dramatically over time. This is because mortgage loans work in such a way that the early payments are primarily in interest, and the later payments are primarily towards the principal.

In the beginning… you pay interest
To help calculate monthly payments for loans based on different interest rates, lenders long ago developed what are known as “amortization tables.” These tables also make it fairly easy to calculate how much money of each payment is interest, and how much goes towards the principal balance.

For example, let’s calculate the principle and interest for the very first monthly payment of a 30-year, \$100,000 mortgage loan at 7.5 percent interest. According to the amortization tables, the monthly payment on this loan is fixed at \$699.21.

The first step is to calculate the annual interest by multiplying \$100,000 x .075 (7.5 %). This equals \$7,500, which we then divide by 12 (for the number of months in a year), which equals \$625.

If you subtract \$625 from the monthly payment of \$699.21, we see that:

• \$625 of the first payment is interest
• \$74.21 of the first payment goes towards the principal

Next, if we subtract \$74.21 (the first principal payment) from the \$100,000 of the loan, we come up with a new unpaid principal balance of \$99,925.79. To determine the next month’s principal and interest payments, we just repeat the steps already described.

Thus, we now multiply the new principal balance (99,925.79) times the interest rate (7.5%) to get an annual interest payment of \$7,494.43. Divided by 12, this equals \$624.54. So during the second month’s payment:

• \$624.54 is interest
• \$74.67 goes towards the principal.