Understanding Your Mortgage
A mortgage is a loan used to purchase real estate, where the property itself serves as collateral. Your monthly payment consists of principal (reducing your loan balance) and interest (the lender's fee for the loan). In the early years of a mortgage, the vast majority of your payment goes toward interest rather than principal — a phenomenon known as front-loading.
For example, on a $320,000 loan at 6.5% over 30 years, your first payment of approximately $2,023 includes about $1,733 in interest and only $290 in principal. By year 20, the split reverses significantly.
Tips to Save on Your Mortgage
- •Make extra principal payments: Even one extra payment per year can shave years off your mortgage and save tens of thousands in interest.
- •Put 20% down: Avoids Private Mortgage Insurance (PMI), which typically adds 0.5–1% of the loan amount annually.
- •Consider a 15-year term: Higher monthly payments but dramatically less total interest paid over the life of the loan.