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3 min read May 15, 2023

Principal And Interest: Mortgage Basics

Buying a home is one of the biggest investments you’ll make in your lifetime. It’s essential to understand the basics of a mortgage payment to make informed decisions about homeownership.

In this blog post, we’ll explore the two primary components of a mortgage payment: principal and interest. Understanding these terms can help you make informed decisions to avoid costly mistakes.

What Is Principal Payment?

The principal is the amount you borrow to purchase a house. To calculate it, subtract your down payment from the home’s selling price. For example, if you buy a $300,000 home with a 20% down payment, your principal balance is $240,000.

Your principal determines how much home you can afford and accumulates interest. Use a mortgage calculator to estimate your monthly payment, but remember to budget for maintenance, insurance, and taxes.

What Is Interest Payment?

Lenders calculate interest as a percentage of the loan amount, which represents the cost of borrowing money. For example, if you borrow $100,000 at an interest rate of 5%, you will pay $5,000 in interest per year.

The interest you pay decreases over time as you pay down the principal balance of your loan.

How Is Interest Rate Calculated?

Lenders divide your outstanding balance by 12 and multiply it by your annual interest rate to calculate your monthly interest payment. For example, if you owe $200,000 on your fixed rate mortgage and your rate is 5%, your monthly interest payment would be $833.33 ($200,000 ÷ 12 x 0.05).

Your mortgage lender applies the remaining amount of your payment to your principal.

Remember, your credit score, income, down payment, and location affect your loan’s interest rate. Improving your credit score can save you thousands of dollars in interest over time!

What Is Amortization?

Mortgage amortization is the process of spreading out a loan into a series of fixed payments over time. Each payment applies to both the principal and interest till the full payment is complete.

This allows you to build equity in your home while making affordable payments over the life of the loan.

What’s the Difference Between Interest Rate and APR?

The interest rate is the amount of money charged by your lender for borrowing the loan, while APR (Annual Percentage Rate) includes the interest rate plus any additional fees and charges.

The APR provides a more comprehensive view of the total cost of the loan, including all costs associated with borrowing the money.

Bottom Line

The home-buying process can be overwhelming, but understanding the basics of your mortgage payment can help ease the stress. Your mortgage payment has two crucial parts – principal and interest.

To make an informed decision when selecting a mortgage option that suits your budget and financial objectives, it is crucial to comprehend how both the principal and interest are calculated.

Frequently Asked Questions

1. How is principal and interest calculated on a mortgage payment?

Each mortgage payment includes principal and interest. Interest is the cost of borrowing money and is calculated as a percentage of the loan amount. The rest of the payment goes towards paying off the principal.

2. How do you separate principal and interest from mortgage payment?

To separate principal and interest from a mortgage payment, the total monthly payment is multiplied by the interest rate to determine the monthly interest payment. This interest payment is then subtracted from the total monthly payment to determine the amount of the payment that goes towards the principal balance.


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