This is How to Understand the Structure of Your Home Loan – Part 1

A typical home mortgage is set up in such a way that's nearly impossible for some to understand. If you want to become a smart homeowner, it's important to understand your mortgage. Here's a summarized breakdown of the way a 30 year home loan contract is constructed.

Principal

A part of each mortgage installment is dedicated to the payment of the principal. Loans are set up so that the sum of principal yielded to the borrower starts out small and grows with each payment. The mortgage payments in the first few years will consist mostly of interest payments, the payments in the last years of the load will consist primarily of repayment of the principal. For a $150,000 mortgage, the principal is $150,000.

Length of the loan

First of all, understand that if you take out a 30-year mortgage, after 15 years, you will have roughly 25% of your home paid off. Compare this to a 15-year plan where you will have 100% of the principal paid after that same 15 years. This is a big difference. There are many other factors why someone might choose a 30-year plan opposed to a 15-year plan. So, knowing what's been explained above, you can take the breakdowns of this 30-year plan and cut the time in half if you're interested in knowing about a 15-year plan instead.

Paying off interest

In the first stages of payment, which on a 30-year loan is the first year, most of your payments - almost 90% - are solely invested in paying off the interest that your lender is owed. The interest payments will steadily decrease over time. Until the 10th year, when that number drops down to about 75%. This is still well more than half of your payment going back to the banker for serving you.