Understanding how mortgage payments work

Extra mortgage payments reduce your debt, but not on a month-to-month basis



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Q: I pay my mortgage monthly. Six months ago I increased these payments by an extra $400. Despite this extra money, the interest amount is still roughly the same on the mortgage. Is that normal? Shouldn’t the interest portion be reduced since I’m making extra payments?

— Mortgage math confusion, Kelowna, B.C.

Answer No. 1: The general misconception is that the more principal you pay off, the smaller the interest portion on your monthly mortgage payment. The problem is it’s not a $1 for $1 ratio. To appreciate how this works, let’s assume you take out a $500,000 mortgage at 2.49%, amortized over 25 years. To carry this mortgage, you would be required to pay $2,237 per month. Over the five year term of your mortgage, you’ll pay $76,896 towards the principal and another $57,345 in interest payments. Now, if you had started your extra payments in the first month of your five year term, your monthly payments would still be $2237, but you would’ve paid $102,417 against your principal (and about $55,800 in interest payments). 

Jake Abramowicz operates as Mortgage Jake and has been a full-time mortgage agent for the past 12 years. Specializing in the residential market, Jake helps financing for every kind of borrower including prime, alternative prime and self-employed. A top agent with Mortgage Edge, Jake thoroughly enjoys working with people and looks forward to helping you answer any mortgage-related questions.

Answer No. 2:  Your mortgage payment is calculated on the outstanding balance of your mortgage so extra payments you make won’t be so noticeable on a month to month basis. That’s because the interest portion of your payment makes up a much larger percentage of your total payment at the beginning of your mortgage terms (say in year 1) then towards the end (say year 25).

It’s important to recognize that your extra $400 goes towards reducing your overall principal balance. By consistently making extra payments you will reduce the amount of interest you pay, saving you a large amount money over the life of your mortgage.

RE Expert - Walter MelansonWalter Melanson is the co-founder and lead analyst at PropertyGuys.com, Canada’s largest private sale franchise network. A background in finance, economics and technology, Walter’s true passion lies in building a more modern approach to buying and selling real estate.

Answer No. 3: Any time you make extra mortgage payments, it goes straight to reducing principal. With a lower principal balance, you’re charged less interest each time you make a payment. If you have a long remaining amortization and/or a very large mortgage size, you might not notice a drastic change in interest each month—at least for the first few years. But paying an extra $400 a month can save someone literally years off his or her mortgage.

RE EXPERT: RobertMcListerRobert McLister is a mortgage planner at intelliMortgage and founder of RateSpy. You can follow him on Twitter at @RateSpy


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7 comments on “Understanding how mortgage payments work

  1. I am looking at switching mortgage lenders when my current 5 yr term is up next month (another bank is offering a lower rate) will I spend more in interest over the lifetime of the mortgage as a result of switching banks? does the front end loading of interest payments act as a deterrent for switching lenders before the loan is paid off? I.e. if I stay with the same bank that I started the mortgage with, will I pay off the mortgage sooner even if the other bank has a slightly lower rate going forward, because of the front load? Thank you.


    • If you have 20 years left on your amortization you have to choose your new mortgage based on the same amortization. You will pay off your mortgage in the same amount of time but you will have smaller payments because of your lower interest rate.


  2. You don’t have to be too concerned about the interest you are paying. Look at the amortization you have left, which could be 25 years, before you increase your monthly payment. After your first increased payment goes through there will be an adjustment to your amortization that shows the new amortization. You will notice that the amortization has gone down which is the number of years it will take to pay off your mortgage.
    I have increased payments and made lump sum payments many times on my mortgages and your savings could be anywhere from a few months to a few years. In the end if you can pay your mortgage off 5 years sooner those are 5 years less in payments


  3. I have 125,000 dollars left on my mortgage. I prepay 15% every year (31,200) and I doubled my mortgage payment. Is it smart to have doubled the mortgage payment is that a big plus or should I just continue the 15%


  4. Mortgage jakes answer makes absolutely no sense. Too much time inside his field = not being able to convey a clear message.


  5. No one really answered the original question thoroughly. Anyone? Should she switch or stay? And why?


  6. I am using this website http://www.cutloan.com
    to calculate how much interest i can saved with extra monthly mortgage repayment.


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