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With mortgages, why is more interest paid at the beginning of a loan than at the end?


You’re talking about a conventional repayment mortgage, in which the monthly payment incorporates some principal and some interest. More interest is paid early for the simple reason that the outstanding balance is higher then and so the interest payment – which is a percentage of that balance – is higher. Because the mortgage payment is a fixed amount comprising interest and principal, if the interest component is higher, then the amount of the principal that is paid off must be lower.

Here’s an example: A 30-year, $300,000 mortgage with a 6 percent interest rate will have a monthly payment of $1,798.65, not counting taxes, insurance or any other charges that may get tacked on. In the first month, the interest due is $1,500 (6 percent of $300,000, divided by 12). Subtract that from $1,798.65 and you’re left with a $298.65 reduction in principal.
Let’s move ahead 15 years. The homeowner by then would have repaid $86,854.37 in principal, leaving a balance of $213,146.53. The interest due on the next payment is $1,065.73 (6 percent of $213,146.53, divided by 12). When you subtract that amount of interest from the monthly payment of $1,798.65, you get a much larger reduction in principal that month – $732.92 – than when the mortgage was brand new. No matter what, if you take out a 30-year mortgage and stick with it all the way, you’ll own the place free and clear.
-Conrad de Aenlle