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How Much Of Your Mortgage Payment Goes Towards Loan Principal?

9 March 2010 35 Comments

If you have a mortgage that is only a few years old, then likely the majority of the payment goes towards interest.  While mortgage interest is tax deductible, it definitely is deflating to see how much money is going towards the bank and not toward paying down your mortgage.  It takes several years of paying out massive interest before you actually start putting a dent in your loan balance.

I have been thinking a great deal about paying down my mortgage and what that might look like.  The encouraging aspect of paying extra money against your mortgage is that paying extra money now will have an effect on every future payment – namely, by paying an extra $1000 today, every future payment will have more of my money towards the principal versus interest.

I decided to take a look at various mortgages and see at what point in the amortization schedule would I at least half of my payment go towards principal versus interest.  This “tipping point” is a great place to get to since more of your money is going towards your own equity / savings versus paying a bank interest!  The tipping point is determined by the interest rate on your loan as shown here:

  • Interest rate: 4.75% / Tipping point: 34% of loan balance
  • Interest rate: 5% / Tipping point: 36% of loan balance
  • Interest rate: 5.5% / Tipping point: 39% of loan balance
  • Interest rate: 6% / Tipping point: 41% of loan balance

These are approximate values and assumes a 30 year fixed mortgage

So, since my mortgage is a 30 year fixed, 4.75% interest loan, I am shooting for that 34% mark as my tipping point.  When I have 34% of the loan paid off, more than half of my payment every month is going towards additional principal on the mortgage.  As such, I may aim to viciously attack my mortgage until I get to that point.  By attacking the mortgage early on the front end, you make a difference for the remaining time that you service the mortgage loan (as opposed to waiting 10 years and then going after your loan).  The process is similar to compounding interest, the more you do early, the larger the impact.

The psychological impact of getting past the tipping point is fairly large.  Many people tend to talk about owning a home as this wonderful thing and renting as “throwing money away”, but most people pay tons of interest and hardly any money towards the equity of their home.  Passing the tipping point will allow you to actually get to a point where you’re not throwing money away.  Your monthly housing expense IS actually putting money away.  Psychologically, knowing that my payment every month is having a large impact on my financial picture would be huge.

Getting To The Tipping Point

Getting to this tipping point is no easy accomplishment.  Like most things in personal finance, the earlier you start and the more you do during the early stages, the better.  The problem is that the early stages are often the hardest times to make these strides.  During your younger years, your earning power isn’t as high and you might still be paying off debt or recovering from financial mistakes.

Couple this with a massive recession and decreased incomes everywhere you look.  How the heck am I supposed to pay down my mortgage these days?  Well, you might not be able to or it might just require some pretty tough choices.  I’m doing my best to sacrifice in some areas and move towards this goal.  I encourage you to do the same.

35 Comments »

  • UptownDenver said:

    I'm a big fan of paying down the mortgage. I'm not doing it as aggressively as I could because I still want to have a good amount of cash in case the market falls again or we see another dip in the economy. My payment is approx. $1300 and I pay an extra $400 every month. I still don't see a lot of movement in the principle but I think your point about compounding interest is spot on. As with all good financial strategy, slow and steady makes a whole lot of progress over time.

    Thanks for the post, it's good to get a reminder that I'm actually spending that $400 wisely, even if it doesn't always feel like it.

  • 20smoney said:

    $400 / month is awesome! What kind of cash reserve do you have?

  • UptownDenver said:

    I've currently got a cash reserve of around $18K. That includes my emergency fund and all other liquid assets (ie. Money Market).

    There is a good possibility that I will be quitting my job soon so I need to keep a lot of cash and as a result may pull back on my mortgage payment plan. I like to have 6 months worth of payments in cash during normal times and keep that in an account specifically for the property.

  • The Rat said:

    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!

  • Tom @ CFB said:

    Good points. While we're not going out of our way to pay down the mortage sooner, I did at least set it up as accelerated bi-weekly payments which shaves off about 7 years of my term!

  • Amateur Financier said:

    Hunh, interesting stuff; it's always nice to learn when you go from paying mostly interest to actually making a dent in your principal. All the more incentive to get the first 34-41% of your loan paid off, I suppose.

  • Amateur Financier said:

    Just a note, I included this post in my weekly round-up: http://www.theamateurfinancier.com/blog/weekly-ro… I didn't see a trackback or another method of contacting you.

  • michael said:

    ive been paying for almost 10 years now on 125,000 and the principal has barely moved at all.
    We are on unemployment with 4 children and have no savings at all not a penny.as soon as we pay our mortgage we have maybe 100 dollars in the bank. we get food stamps to eat every month,and have no extra to buy our kids anything for fun or eating out, or enjoy a day out.The house is falling apart,its cold in the winter becouse i cant afford to buy feuel if we want a roof over our heads so take your pick.We live here in America and live at the brink of poverty with no end or hope in sight. America has oppressed our family with the very high cost of living,and paying taxes we also cannot afford to pay.my guess is we will end up in a trailor, or simply on the street if things continue the way they are.But you know to all the people making it its just too bad for us A.

  • Luiza Warren said:

    The interest rates on mortgages are really high and we usually overpay a lot. Once I have calculated the amount I overpay with my mortgage and it was really huge. However, we have nothing to do except taking home loans in order to buy a house as there is no opportunity to buy it for cash. The prices are to high for common people to manage. It's almost impossible to save money as we can't be sure in financial stability and besides, it will take long years for saving the necessary amount. Moreover, prices change almost every day. Well, I think we can't live without loans, however, it's very difficult to get them today due to strict measures provided by banks.

  • martin jones said:

    i live in the UK and have reduced my mortgage repayments from £925/month to £427/month in three years. I have achieved this by working very hard and making regular capital repayments. I love the appreciating circle i now find myself in. Now having a disposable £1800 ($2500) per month. This allows me to enjoy life more, and to capitalise my savings, paying further capital re-payments.

  • Electric Shaver said:

    Great article. I really enjoy share for my friends and post on my blog.

  • theeisee said:

    I know most of the interest gets paid the first 5 years . I am considering refinancing, to make my payments lower each month. I have 30 year fixed now , that i have had for 3 years. If i refinance it starts back at 30. So do you think refinancing is a good thing to do?

  • Mike said:

    Really smart post. I am in the process of paying down my mortgage aggressively. With real estate taxes, it's about 800/month. I pay an additional 860 on top of that. So, I'm on track to pay it all off in about five years after initiating the loan. It is great to get a statement in the mail from Wells Fargo, showing the balance going down. As for other investments, I have a ROTH IRA, which doubles as my emergency savings. I also contribute 10% of my income to a work 401K, with a 7% company match, so I think I'm covered in stocks. I'm using the blog to explore and share ways to pay down the mortgage even sooner, because it's that important to me. Best of luck to everyone trying to do the same…

  • joe said:

    So, with barely 0 money, how are you able to post? In the library?

  • provo mortgage said:

    Interest is the portion of your monthly mortgage payment that is paid to the bank as a fee for letting you borrow money. At the beginning of your loan, when your balance is at its highest, most of your monthly payment goes towards paying interest.

  • Chris Yates said:

    Did you all know that in some cases if you pay extra on your mortgage, the lender might not apply it to principal unless you specifically ask them to. Often they'll just apply it to future payments so the interest keeps racking up.

  • Dinah said:

    Thank you Chris, I have heard this as well. You must let the lending institute know to apply the extra $ to principal. I have also heard that a lending institute can charge you for paying the loan off early. Does anyone know about this?

  • ben said:

    so when your mortgage goes down lets bsay from 200000 to 100000 do you keep paying interest on the 200000 or the 100000. great site by the way.

  • Remortgagesearch said:

    Interesting post; with the plethora of interest only mortgages it shows how important it is to ensure the borrower has a repayment vehicle in place.

  • James Miele said:

    The interest rates on mortgages are really high and we usually overpay a lot. Once I have calculated the amount I overpay with my mortgage and it was really huge. However, we have nothing to do except taking home loans in order to buy a house as there is no opportunity to buy it for cash.

  • ArthurPeel said:

    Thanks for the post, it's good to get a reminder that I'm actually spending that $400 wisely, even if it doesn't always feel like it.

  • Chase said:

    I am a little confused. We pay a little under $1000 a month and our interest rate is 4.75 we still owe $110k on the house. My wife has money saved (about $30k) and wants to invest it, we were thinking about buying a 2nd home to rent out but that opens up all sorts of new problems. Would it be better to just put like $20 toward the principal or to make $400 a month extra payments for 4 years?
    Also how does changing payments from monthly to biweekly help?

  • Chase said:

    Sorry I meant $20k not $20

  • Mortgage Loans said:

    To get the mortgage loans are also possible nowadays. I want to ask one thing that is mortgage interest tax deductible? Should I meet with any of the consultants to get more details on mortgage loans interests.

  • Damon said:

    Great! point Chris.

  • Damon/ minnesota said:

    This site really offers great advice , and I appreciate all the good feed back. The one piece of advice; slow, and steady wins the race, but remember too that each dime you put towards the interest you can't take it back out like a credit card, so please all be sure to send extra if you can, but do it wisely. Good luck to you all, and congratulations on giving the American dream a shot.

  • Cas Web said:

    Then you have far to much money and i think you should share some with myself and all these other lovely people who are just trying to make their pennies stretch a little further.

  • Tina said:

    I have this same question! Did someone answer it? My payments have been about $640 accelorated biweekly for almost 2.5 years. It would be interesting to see a chart or something that shows how my interest payments have changed over the last 2.5 yrs.

  • Ivy said:

    Hi! Can anybody help make a decission. We have a 15 yr fixed mortage that is due on May 2024. Our current interest rate is 4.88%, making about $1400 monthly payment. We wanted to get it paid as early as possible. We can make an extra payment of $300 a month. The bank has offered us of a 3.99% interest rate but will push it to 20 yr fixed mortgage, no finance charge. Should we refinance and just make the same payment as we are making right now and the extra $300 a month? or should we leave it as it is and just pay the extra $300? Any advice? Thanks!

  • Bellevue dentist said:

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  • SEO Clock said:

    How do you calculate what your mortgage payment will be without using a mortgage calculator?

  • Frugal Home Owner said:

    I would say that any job at this point is better than no job. I got laid off my job 3 yrs ago and had to go to work for eight bucks an hour part time. You know what? It paid the bills and put some food on the table. With the two of you working eight bucks an hour, you can do it if you are frugal. There is work, you just have to be willing to take a bite in pay for a while.

  • MrsB said:

    Ask for a history on your payments, ammoritazation.