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Where does interest go?

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Regular Contributor

Where does interest go?

So if you pay interest the most heavily up front on a mortgage... is that money really just go straight to the bank... and you get no benefit to it?

 

When you refinance - and get a whole new loan - you still pay interest (hopefully at a lower rate) - but until the mortgage principal depreciates - your perpetually paying interest?

 

How do you know how much principal is on your loan and how much interest ?

 

Thank you. 

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Message 1 of 8
7 REPLIES 7
Established Contributor

Re: Where does interest go?

Check the amortization schedule of the proposed loan.

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Licensed NC Mortgage Loan Originator
Message 2 of 8
Moderator Emeritus

Re: Where does interest go?

If you put extra towards the mortgage up front, you need to specify that the extra funds go towards the principal.  Interest always goes into the mortgage companies bank account, its how they make money off of you. 

When you log into the website or look at your mortgage statement, it should list the principal balance and also how much of the payment goes toward principal.  The amortization schedule from when you signed up for your mortgage will show how it changes over time. 

Here is an article that explains how a mortgage works. 

 

https://www.thebalance.com/how-amortization-works-315522

 

 


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Message 3 of 8
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Valued Contributor

Re: Where does interest go?

ANY simple interest fixed rate loan (car, house, etc.) will have the most interest in the beginning.

Interest is a percentage of what you owe.  

The more you owe, the more the interest payment will be.

As your balance is reduced (usually with time based on payments) the amount of interest you are paying goes down.

 

If you want to know exactly how much is going to interest, your ammorization table will show it.

See what your first payment is and it will tell you the interest, the principle, and the taxes and insurance.

 

If it says $100 principal and you would like it to be say $300 just add $200 to every payment and you will always be applying at least $300 to principle each payment.  Your interest will not increase (it actually decreases) and your insurance and taxes will stay the same.

 

So instead of paying $700 pay $900 and your principle will build faster and your number of payments required will also decrease.

 

Hope that helps.

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Message 4 of 8
Moderator Emeritus

Re: Where does interest go?


@webhopper wrote:

If you put extra towards the mortgage up front, you need to specify that the extra funds go towards the principal.  Interest always goes into the mortgage companies bank account, its how they make money off of you. 

When you log into the website or look at your mortgage statement, it should list the principal balance and also how much of the payment goes toward principal.  The amortization schedule from when you signed up for your mortgage will show how it changes over time. 

Here is an article that explains how a mortgage works. 

 

https://www.thebalance.com/how-amortization-works-315522

 

 


@webhopper Webby!  Hi Hi Hi!




        
Message 5 of 8
Moderator Emeritus

Re: Where does interest go?

@Revelate   Haiii~!  

I am hanging out cause I'm in the market for a mortgage Smiley Surprised

 


Starting Score: 08/29/2011 TU 671 EQ 674
Current Score: TU 676 EQ 676 EX 676
Filed Chapter 13 on 06/01/2017 after job loss.

Goal: FHA Construction Loan

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Message 6 of 8
Moderator Emeritus

Re: Where does interest go?


@webhopper wrote:

@Revelate   Haiii~!  

I am hanging out cause I'm in the market for a mortgage Smiley Surprised

 


@webhopper Well this is the right place for it Smiley Happy.

 

Glad to see you around and hope everything is going well for you!




        
Message 7 of 8
Valued Contributor

Re: Where does interest go?

Yes, the interest goes to the bank.  They loaned the money and charge an interest rate on the oustanding balance.  The interest is the fee they get for loaning their money out, it's kinda their business model.  As one poster said above - check out an amortization schedule.  Since the interest is charged on the outstanding balance the interest is going to be higher than later in the loan after you've made numerous principal payments and have a lower principal balance.  Same reason an interest only loan always has the same payment - same outstanding balance.  Once you refinance said loan you start over, but at a lower interest rate as you mentioned.  

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Message 8 of 8
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