Mortgage Payment – How Much Goes Towards Principal and Interest

After talking with a lot of my friends that are interested in buying their first houses, I started to realize not many new home buyers know exactly how much of that monthly mortgage payment will go towards principal and how much will go towards interest. I thought it would be helpful to show a few examples.

Example 1:

Mortgage Amount: 160,000
Interest Rate: 5%
Mortgage Type: 30 Years Fixed

In this scenario, the monthly payment will be $858.91. You can easily plug the numbers above into any mortgage calculator and you will come up with the $858.91. However, to me that $858.91 means nothing. I want to know exactly how much is going towards principal and interest.

In the first 12 months, the buyer in this example would pay $7,946.39 towards interest and only $2,360.58 towards principal. Over the entire life of the mortgage, the buyer will pay a total of $149,209.25 in interest. Just to be clear, that $149,209.25 is in addition to the $160,000 principal that will be paid. Thus,the grand total of the 30-year mortgage would be $309,209.25.

Example 2

Mortgage Amount: 160,000
Interest Rate: 5%
Mortgage Type: 15 Years Fixed

In this scenario, the monthly payment will $1,265.27. That payment is $406.36 more than the first example because of the 15 year term.

In this example you are nearly paying the same amount towards principal as you are in interest. In fact, starting with the 15th annual payment the buyer is paying more towards principal than towards interest. Over the 15 years of the mortgage, $67,748.56 is paid towards interest and the grand total would be $227,748.56. As you can see, the interest payments for the 15-year term would be $81,460.69 less than the 30-year term.

This might be a real eye opener to some. However, a 15-year term might not be realistic for everybody. However, if you have the extra cash available it might be wise to pay a little extra each month towards the principal. The faster you pay down the principal on the mortgage, the less interest you will pay. I know some will argue that mortgage interest is tax deductible so that it isn’t wise to pay more towards the principal. However, it isn’t certain that mortgage interest will be tax deductible forever. I’m not saying that this is imminent, but who knows what will happen with the tax code 5, 10 or 15 years from now.

Edwin C

Edwin is a marketer, social media influencer and head writer here at Money In The 20's. He manages a large network of high quality finance blogs and social media accounts. You can connect with him via email here.

9 thoughts on “Mortgage Payment – How Much Goes Towards Principal and Interest

  • July 18, 2011 at 12:34 pm
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    My wife and I decided to do a 15 year mortgage. When we were signing the papers the banker was shocked to see people are age doing a 15 year mortgage. I just hate throw money away to interest payments so it is worth the extra money each month.

    Reply
    • July 21, 2011 at 9:35 am
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      Good for you! You will pay a lot more towards the principal and own that house a lot sooner!

      Reply
  • July 18, 2011 at 6:29 pm
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    We have a 30 year mortgage but pay extra. I can’t stomach how little goes to the actual principal otherwise. Ug.

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    • July 21, 2011 at 9:36 am
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      Yeah, it is tough to stomach paying so much interest and so little principal in the beginning of a 30-year mortgage. You are doing the right thing with paying extra though!

      Reply
  • July 19, 2011 at 2:57 am
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    Personally, I think the most important thing for somebody or a couple can do is pay down the mortgage if they own a home. I think this priority even supersedes investing in RRSPs and non-registered investments. Despite the interest, there are ways to pay down sizable chunks of the principal each year. Living a frugal and responsible lifestyle can get you mortgage free faster, and once that occurs, you can plow all your hard earned dollars into investments and for retirement purposes.

    Nice post!

    Reply
  • July 22, 2011 at 4:25 pm
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    Isn’t it sad to realize that all that money is going towards interest? We realized this fast and decided that we were going to increase our payments so we’d pay less interest over the long run……. It isn’t until you look at the table that you realize why a short amortization is better financially, if you are able to afford it.

    Reply
  • July 27, 2011 at 5:19 pm
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    These numbers are sobering, and the reason why I am agressively paying down my mortgage.
    I’ve knocked down 14% in 8 months, as detailed on my blog.
    After saving for retirement, is the most important financial thing on my mind.
    Oh, and I have a 15 year mortgage. 30 years is too long!

    Reply
    • July 28, 2011 at 6:45 am
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      14% in 8 months is pretty impressive! Keep up the great work!

      Reply
  • August 29, 2011 at 12:44 am
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    A great post .Mortgage payment how much goes towards principal and interest. This article is a big eye opener. I think this priority even supersedes investing in RRSPs and non-registered investments. Despite the interest, there are ways to pay down sizable chunks of the principal each year.

    Reply

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