So say I mortgage a house for $240,000 at 10% interest.
Is that interest recalculated every month depending on how much I still owe on the principal?
So if mortgage is $2500 (that means $2000 of that is just for the interest and $500 is going towards the principal) but instead of $2500, I pay $10,000 (which means $8000 went straight towards principal) will the next month’s payment’s interest payment be $240,000 – $8000 = $232,000*.10/12 = $1933 instead of $2000?
Comments
generally, no. you will save interest but the payment remains the same, you just stop payments sooner.
What you’re describing is a part of what’s known as payment amortization, where your monthly payment stays the same but the proportion of that payment that goes to interest and the proportion that goes to principal changes over time.
Early in the mortgage, like you note, the large portion of your payment is going towards interest on the remaining principal. However, as the remaining principal decreases the amount of interest accrued on that principal reduces, meaning that a higher portion of your loan will go to reducing principal further.
For mortgages in particular paying extra won’t change your monthly payments, but by reducing principal even a little bit more early in the mortgage it can have a surprisingly large impact on the total length of the mortgage.
APR means annual percentage rate. If the interest is compounded monthly, then that means the interest rate used in the calculation is the APR/12. If it was compounded daily, then it would be APR/365.
Mortgages are set up so the payment will always be the same, it’s just that if you make no extraprincipal payments then most of your early payments are going towards interest because in 30 years that money you paid will be offset by the length of the loan term.
It depends on how the loan is written. Simple interest loans work exactly as you described. The principle amount of each payment is much smaller at the begining of the loan than at the end. Add-on loans front load the interest, so you really get no financial advantage by paying more toward the principle.
https://dealpack.com/blog/understanding-the-difference-between-simple-and-add-on-interest
Each month you pay interest + principal and they calculate it so that they payment is the same over the term of the loan. Paying extra principal won’t reduce that payment, it will reduce the amount of payments you need to make until it’s all paid off. So no, without refinancing, your payment will be the same, but the time to pay off will be shorter.