How are mortgage payments decided? [duplicate]
It's easiest to get your payment from the PMT function in Excel or Google Sheets.  So a $100,000 30 year mortgage at 3% looks like this: The basic calculation is pretty simple.  You take the annual interest rate, say 3%, divided by 12, times the existing principal balance: The idea is that borrowers would like to have a predictable payment.  The earlier payments are proportionally more interest than principal than later payments are but that's because there is much more principal outstanding on month 1 than on month 200. It's so that your total mortgage payment stays the same every month. Obviously, the interest due each month decreases over time, as part of the principal is paid off each month, and so if the proportion of interest and principal repayments were to stay the same then your first payment would be very large and your last payment would be almost nothing. It has nothing to do with forcing people to pay off their debt; in that case it would make better sense to have people pay off debt rather than interest. It is because you want to have your actual payment stay the same each month, which is easier for the vast majority of people to comprehend and put into their budget. It is called an annuity in Finance terms. In theory you could use another method - eg. pay of the same amount of debt each month - then your interest payments will decrease over time. But in that case your monthly payment (debt + interest) will not be stable - It will start of high and decrease a little bit each month. With an annuity you have a constant cashflow. In Finance you generally operate with three methods of debt repayment: Annuity: Fixed cashflow. High interest payment in the beginning with small debt payments - later it will be reversed. Serial loan: Fixed debt payments. Debt payments are equally spread out accross the period - interst is paid on the remaining debt. Cash flow will decrease over time, because interest payments become smaller for each period. Standing loan: You only pay interest on the loan, no debt payments during the period. All debt is payed back in the end of the loan. In Europe it is common practise to combine a 30 year annuity with a 10 year standing loan, so that you only pay interest on the loan for the first 10 years, thereafter you start paying back the debt and interest, the fixed amount each month (the annuity). This is especially common for first-time buyers, since they usually have smaller salaries early in life than later and therefore need the additional free cash in the beginning of their adult life.
"Mortgage agreements usually have a clause in which the mortgagor warrants that all the statements and information which they have provided to the mortgagee are correct. In your case, this probably included your credit score. Since your ""statement"" concerning your credit score is no longer accurate, they want you to update the agreement with the new information before the final version is prepared. Credit scores change for many random reasons. The agencies re-calibrate formulas constantly. It is unlikely that your mortgage negotiations affected your credit score. The bank will only start reporting the facts of mortgage to a credit agency when you start paying (or not paying) the loan. Credit agencies don't care whether you have a loan or not. They only care whether you have paid your debts, or not paid them." Unfortunately there is no universal answer to this question. Each mortgage servicing company will handle it differently according to their own policies. The best way to handle this problem is to talk to your mortgage servicing company and specify that you want all of your over-payments to be applied to principle (assuming that is indeed what you want). Most companies will be willing to work according to your stated preferences, but there may be some companies that have a specific procedure for how to make sure that preference is applied. Unfortunately there is very little you can do about it if you ended up with one of the less friendly mortgage servicing companies out there. Maybe threaten a lawsuit. Good luck. "One way to think of the typical fixed rate mortgage, is that you can calculate the balance at the end of the month. Add a month's interest (rate times balance, then divide by 12) then subtract your payment. The principal is now a bit less, and there's a snowball effect that continues to drop the principal more each month.  Even though some might object to my use of the word ""compounding,"" a prepayment has that effect. e.g. you have a 5% mortgage, and pay $100 extra principal. If you did nothing else, 5% compounded over 28 years is about 4X. So, if you did this early on, it would reduce the last payment by about $400. Obviously, there are calculators and spreadsheets that can give the exact numbers.  I don't know the rules for car loans, but one would actually expect them to work similarly, and no, you are not crazy to expect that. Just the opposite." A security is a class of financial instrument you can trade on the market.  A share of stock is a kind of security, for example, as is a bond. In the case of your mortgage, what happens: You take out a loan for $180k.  The loan has two components. a.  The payment stream (meaning the principal and the interest) from the loan b.  The servicing of the loan, meaning the company who is responsible for accepting payments, giving the resulting income to whomever owns it. Many originating banks, such as my initial lender, do neither of these things - they sell the payment stream to a large bank or consortium (often Fannie Mae) and they also sell the servicing of the loan to another company. The payment stream is the primary value here (the servicing is worth essentially a tip off the top).  The originating bank lends $180k of their own money.  Then they have something that is worth some amount - say $450k total value, $15k per year for 30 years - and they sell it for however much they can get for it.  The actual value of $15k/year for 30 years is somewhere in between - less than $450k more than $180k - since there is risk involved, and the present value is far less.  The originating bank has the benefit of selling that they can then originate more mortgages (and make money off the fees) plus they can reduce their risk exposure. Then a security is created by the bigger bank, where they take a bunch of mortgages of different risk levels and group them together to make something with a very predictable risk quotient.  Very similar to insurance, really, except the other way around.  One mortage will either default or not at some % chance, but it's a one off thing - any good statistician will tell you that you don't do statistics on n=1.  One hundred mortgages, each with some risk level, will very consistently return a particular amount, within a certain error, and thus you have something that people are willing to pay money on the market for. A payment of $224 at 7.2% interest will pay off a $33000 mortgage in 30 years. Unfortunately, I'm on cold medicine so guessing was the only way I got to the answer, but I guessed right on the first try :). However, if you like algebra: The following formula is used to   calculate the fixed monthly payment   (P) required to fully amortize a loan   of L dollars over a term of n months   at a monthly interest rate of c. [If   the quoted rate is 6%, for example, c   is .06/12 or .005]. P = L[c(1 + c)n]/[(1 + c)n - 1] What  sounddude said, mortgage servicing companies do not get to unilaterally change the terms of a mortgage.  Although I'm inclined to guess it was a simple coding error on BOA's part (wrong processing box got checked when mortgage was acquired) that was never caught, in which case BOA *should* be falling all over themselves to fix the situation (on their dime).  If they don't fix it in a hurry, then I'd hope they get their head handed to them in court in a hurry. In the US, our standard fixed rate mortgages would show no difference. My payment is calculated to be due on the 1st of each month.  When I first got a mortgage, I was intrigued by this question, and experimented. I paid early, on the 15th, 2 weeks early, and looked at my next statement. It matched the amortization, exactly. Mortgages at the time were over 12%, so I'd imagine having seen the benefit of that 1/2% for the early payment.  Next I paid on the last day before penalty, in effect, 2 weeks late. I expected to see extra interest accrue, again, just a bit, but enough to see when compared to the amortization table. Again, no difference, the next statement showed the same value to the penny. Unless you are getting the loan from a loan shark, it is the most common case that each payment is applied to the interest accrued to date and the rest is applied towards reducing the principal.  So, assuming that fortnightly means 26 equally-spaced payments during the year, the interest accrued at the end of the first fortnight is $660,000 x (0.0575/26) = $1459.62 and so the principal is reduced by $2299.61 - $1459.62 = $839.99 For the next payment, the principal still owing at the beginning of that fortnight will be $660,000-$839.99 = $659,160.01 and the interest accrued will be $659,160.01 x (0.0575/26) = $1457.76 and so slightly more of the principal will be reduced than the $839.99 of the previous payment.  Lather, rinse, repeat until the loan is paid off which should occur at the end of 17.5 years (or after 455 biweekly payments). If the loan rate changes during this time (since you say that this is a variable-rate loan), the numbers quoted above will change too. And no, it is not the case that just %5.75 of the $2300 is interest, and the rest comes off the principle (sic)? Interest is computed on the principal amount still owed ($660,000 for starters and then decreasing fortnightly). not the loan payment amount. Edit  After playing around with a spreadsheet a bit, I found that if  payments are made every two weeks (14 days apart) rather than 26 equally spaced payments in one year as I used above, interest accrues at the rate of 5.75 x (14/365)% for the 14 days rather than at the rate of (5.75/26)% for the time between payments as I used above each 14 days, $2299.56 is paid as the biweekly mortgage payment instead of the $2299.61 stated by the OP, then 455 payments (slightly less than 17.5 calendar years when leap years are taken into account) will pay off the loan.  In fact, that 455-th payment should be reduced by 65 cents.  In view of rounding of fractional cents and the like, I doubt that it would be possible to have the last equal payment reduce the balance to exactly 0. Construction loans have an entirely set of rules and factors than mortgages and that's hard to reconcile into one instrument.  Also, I'm guessing the bank would be a bit shy about giving a commitment to a home loan before they have any information about how the construction process is going.  There would have to be a ton of contingencies put into mortgage and they probably can't account for everything. There is one basic principle to apply here:  to compare money paid at different times, all the amounts must be compounded or discounted to the same point in time. In this case, the moment of the initial  $225,000 loan is convenient. At that moment, you get $225,000 You then make 30 payments on the 40% mortgage.  The amount of these payments has to be calculated;  they're paying off a $90,000 mortgage with 30 monthly payments at a monthly rate of 0.5% Finally, you make 30 payments of an amount X, starting one month after the 40% mortgage ends. So far we've just listed the amount and time of all the payments back and forth. A time-line type diagram is a huge help here. Finally, use compound interest and annuity formulas to bring all the payments to the starting point, using an interest rate of 1% a month! Equate money in with money out and solve for X Easier to copy paste than type this out. Credit: www.financeformulas.net Note that the present value would be the initial loan amount, which is likely the sale price you noted minus a down payment.   The loan payment formula is used to calculate the payments on a loan.   The formula used to calculate loan payments is exactly the same as the   formula used to calculate payments on an ordinary annuity. A loan, by   definition, is an annuity, in that it consists of a series of future   periodic payments. The PV, or present value, portion of the loan payment formula uses the   original loan amount. The original loan amount is essentially the   present value of the future payments on the loan, much like the   present value of an annuity. It is important to keep the rate per period and number of periods   consistent with one another in the formula. If the loan payments are   made monthly, then the rate per period needs to be adjusted to the   monthly rate and the number of periods would be the number of months   on the loan. If payments are quarterly, the terms of the loan payment   formula would be adjusted accordingly. I like to let loan calculators do the heavy lifting for me. This particular calculator lets you choose a weekly pay back scheme. http://www.calculator.net/loan-calculator.html Simply put, for a mortgage, interest is charged only on the balance as well. Think of it this way - on a $100K 6% loan, on day one, 1/2% is $500, and the payment is just under $600, so barely $100 goes to principal. But the last payment of $600 is nearly all principal.  By the way, you are welcome to make extra principal payments along with the payment due each month. An extra $244 in this example, paid each and every month, will drop the term to just 15 years. Think about that, 40% higher payment, all attacking the principal, and you cut the term by 1/2 the time. "A Tweep friend asked me a similar question. In her case it was in the larger context of a marriage and house purchase. In reply I wrote a detail article Student Loans and Your First Mortgage.  The loan payment easily fit between the generally accepted qualifying debt ratios, 28% for house/36 for all debt. If the loan payment has no effect on the mortgage one qualifies for, that's one thing, but taking say $20K to pay it off will impact the house you can buy. For a 20% down purchase, this multiplies up to $100k less house. Or worse, a lower down payment percent then requiring PMI.  Clearly, I had a specific situation to address, which ultimately becomes part of the list for ""pay off student loan? Pro / Con""  Absent the scenario I offered, I'd line up debt, highest to lowest rate (tax adjusted of course) and hack away at it all. It's part of the big picture like any other debt, save for the cases where it can be cancelled.  Personal finance is exactly that, personal. Advisors (the good ones) make their money by looking carefully at the big picture and not offering a cookie-cutter approach." Because a paying down a liability and thus gaining asset equity is not technically an expense, GnuCash will not include it in any expense reports. However, you can abuse the system a bit to do what you want.  The mortgage payment should be divided into principle, interest, and escrow / tax / insurance accounts. For example: A mortgage payment will then be a split transaction that puts money into these accounts from your bank account: For completeness, the escrow account will periodically be used to pay actual expenses, which just moves the expense from escrow into insurance or tax. This is nice so that expenses for a month aren't inflated due to a tax payment being made: Now, this is all fairly typical and results in all but the principle part of the mortgage payment being included in expense reports. The trick then is to duplicate the principle portion in a way that it makes its way into your expenses. One way to do this is to create a principle expense account and also a fictional equity account that provides the funds to pay it: Every time you record a mortgage payment, add a transfer from this equity account into the Principle Payments expense account. This will mess things up at some level, since you're inventing an expense that does not truly exist, but if you're using GnuCash more to monitor monthly cash flow, it causes the Income/Expense report to finally make sense. Example transaction split: "Often the counter-party has obligations with respect to timelines as well -- if your buying a house, the seller probably is too, and may have a time-sensitive obligation to close on the deal. I'm that scenario, carrying the second mortgage may be enough to make that deal fall through or result in some other negative impact. Note that ""pre-approval"" means very little, banks can and do pass on deals, even if the buyer has a good payment history. That's especially true when the economy is not so hot -- bankers in 2011 are worried about not losing money... In 2006, they were worried about not making enough!"