What is Mortgage Principal? When you start making mortgage payments, you’ll notice that it splits into two portions: interest and principal. The interest is the cost of borrowing money, but the principal refers to the actual amount of the loan. Each month, your payment reduces both the amount of interest expense that you owe, as well as the principal remaining. If you look at the amortization schedule for your loan, you’ll see that, at the beginning of your loan, the majority of your payment goes to cover interest, while a small amount goes to principal. Over time, the ratio shifts, with more and more of your payment covering principal. (mortgage principal definition)
But what if you could pay a little more each month and eat away at that principal? In Canada, if you get an open mortgage, you can make additional principal payments without penalty. A closed mortgage charges you money if you make principal payments ahead of time on the basis of the interest differential. A closed mortgage has a significantly lower interest rate, but the trade-off is that you can’t make early principal payments early without a penalty.
How much of mortgage payment is principal
Making principal payments ahead of time can cut your costs significantly over time. Let’s say that you buy a $500,000 house and put down 20 percent, leaving $400,000 as the principal on the loan. You get an open mortgage at 6 percent, and your monthly payments are $2,398.20 for principal and interest.
What if you added $201.80 to each of those payments, bringing them to an even $2600? Instead of making 360 payments, you’d only have to make 294 of them. 66 x $2398.20 means that you will have paid out $158281.20 less. Also, you’re done making mortgage payments 5 1/2 years sooner, leaving your budget more flexible at an earlier point in time.
Remember that open mortgages have higher interest rates in Canada. What if you had the same mortgage at the lower rate? You can secure a closed mortgage at 4.25 percent. Over the life of the loan, you would have payments of $1967.76. Over 30 years, you would pay out a total of $708,393.60. Over the shorter life of your open mortgage, you would pay out $705,070.80 — so about the same. So looking at the comparative rates for open and closed mortgages is important, because you want to make sure that paying that higher interest is worth it.
If you are interested in exploring mortgage scenarios, contact one of our professionals at Amansad Financial. We’ll look at the best options for you so that you get the best deal possible.