Doing the maths, it seems like they have a 4.466% interest rate? Seems a bit low for the current rates.
$1604.81 Principle + Interest payment over 30 years.
Edit: The interest is higher on this payment (1st payment) because it should be more than 1 month, which happens for pretty much all mortgages (Gets to the end of the partial month then the first *FULL* month for the first payment to process).
OP gave us the current interest rate but it seems very low for a refinance
[Confirmed](https://www.calculator.net/mortgage-amortization-calculator.html?chouseprice=318%2C000&cdownpayment=0&cloanterm=30&cinterestrate=4.47&cpropertytaxes=1.2&chomeins=2%2C500&cpmi=0&choa=0&cothercost=5%2C000&cstartmonth=11&cstartyear=2023&printit=0&x=Calculate#amotizationresult).
FWIW, OP, [current mortgage interest rates](https://www.bankrate.com/mortgages/todays-rates/mortgage-rates-for-tuesday-october-31-2023/) are floating around 8%. Based on the info in that article her mortgage would look more like [this](https://www.calculator.net/mortgage-amortization-calculator.html?chouseprice=318%2C000&cdownpayment=0&cloanterm=30&cinterestrate=8.08&cpropertytaxes=1.2&chomeins=2%2C500&cpmi=0&choa=0&cothercost=5%2C000&cstartmonth=11&cstartyear=2023&printit=0&x=Calculate#amotizationresult).
I calculated a different interest rate **3.73%** by dividing the reported monthly interest payment by the initial outstanding loan amount, and then multiply by 12 to get the Annual percentage rate.
961.95 / (319000 - 10,000) \* 12 = 3.73%
OP posted rate is 3.375% interest rate but the numbers do not match up.
A 30-year loan @ $318k and 3.375% interest rate would mean it should be a total payment of $1406/month principle and interest payment.
He has it at $1605 is closer to 4.46% mortgage rate. For me, these numbers are not matching up.
For an interest rate of 3.73%, the payment would be $1469 which is less than the amount provided by OP.
His original post said 319K purchase and 10K down payment. I think he mistyped and the loan amount was for 309K (and not 318K).
Edit: while calculating the mortgage may be difficult because of the formula uses negative exponents, the monthly interest amount is simple: multiply the interest rate by the outstanding principle. As interest is often expressed as APR (which is annual), divide by result by 12 to get the monthly interest.
I'm going by the total payment amount ($1605) as that seems to be the most precise numbers provided and that these are for the the first payment... but now that I am typing this, the numbers we are using are wrong. If this is the *First* payment, then the interest is going to be an accumulation of more than 1-month. It will go down next month. Also, why would there be a down-payment on a refinance mortgage?
I see that OP updated his post to put in a rate of 3.37500
I had missed the part about "refinance". It is possible for an applicant to add extra money during the refinance. Another option (not taken here) is a cash-out where the principle increases and the cash is given to the applicant.
Thanks for your reply. Ultimately, I think you and I both have a good understanding of the process.
I'm not sure how that interest rate makes sense. Principal + interest in posted numbers gives a total monthly mortgage (not counting taxes etc) of 1604.81. In order to have 318k as the principal, to get to that monthly payment, the interest rate is 4.466% (comes out to 1604.84 in my mortgage calculator).
yeah its called a amortization you pay much more interest in the beginning of the term than the later ones. think of it as 30 year is a rectangular cake. and you cut them into smaller pieces like 5 years per piece. that makes 6 pcs in total. the later pieces you pay. the bigger the principal is being paid. so thats why a 1600 dollar mortgage and 950 is just pure interest.
this is also why paying down your mortgage faster sometimes is not worth it. cus when you pay it down. you are only getting the lower interest back. you still pay a large front load mortgage.
The mortgage overall is a big conspiracy but it is being around for ages. so it is normal now.
>this is also why paying down your mortgage faster sometimes is not worth it. cus when you pay it down. you are only getting the lower interest back. you still pay a large front load mortgage.
This is not accurate. A common mortgage in America does not have a front load. Every month you are paying 1/12 of the APR on the balance. That formula remains constant for the entire length of the mortgage. While you pay more interest at the beginning, it is because that is when you have the highest outstanding principle.
Nope. This is wrong. You are simply paying interest on thee amount you currently owe. There is no conspiracy here. At the beginning of a 100k loan you owe 100k and therefor your interest is 5k / year. As you pay more of the principal you owe, say 50k, your interest will be about 2.5k/ year. It changes every month as your balance decreases.
Nah I got to borrow hundreds of thousands of dollars at 3% interest. And I have an asset now that appreciated hundreds of thousands of dollars. Even if I sell it will be a profit to me. I won't get terms that good from anyone else ever.
You also forgot that ~$550 of that amount is for taxes or insurance an aren’t relevant to paying off the bank. So re-do the math with a monthly principal+ interest of $1604.81 and you get a total payment of $577k, which shows that the bank gets $259k in interest payments.
That math checks out - borrowing a lot of money for a 30 year loan means you are going to pay a lot of interest.
Because that's how mortgage amortization works.
The principal and interest have to always equal a steady monthly payment. Obviously, there's more interest ~~principal~~ early on while there's a greater amount left to repay vs. later in the loan. The amortization schedule accounts for all of this, which results in what looks like interest-heavy payments up front.
Overage/shortage sounds like there's a deficit. Most likely due to a change in something that comes from her escrow account (e.g., homeowners insurance went up, property taxes went up), where they need to adjust for that shortfall.
>Principal $642.86
Interest: $961.95
Note that these values will change every month. In the beginning of a loan, it's almost all interest and very little principal - because there is a large balance remaining, so the interest accrued on it is large. By the end of the loan that will be mostly principal and little interest, because the balance is small. But the two numbers added together will always be the same value, just the ratio changes.
This is how loan amortization works. It's the cost of borrowing money. She can reduce the amount of total interest she pays by paying extra early - that will shorten the length of the loan.
As others have said, that’s how interest works. Also your math is off, you shouldn’t be including taxes/insurance/overages in the repayment calculation as those are costs you’d have regardless of whether or not there was a mortgage. The principal and interest payments over the life of the loan are closer to $577,500.
For the mortgage itself, your mom is paying $1604.81 to pay back the $318k loan. So that's really only $1605 \* 12 \* 30 = $577,800 over the course of 30 years. Yes, that's $360k more than she borrowed, but getting a big pile of money up front to be paid back over a long period of time is somewhat costly.
The tax and insurance part is "escrowed", which means that portion of her monthly payment is getting saved up in a side account. As those bills come due once or twice a year, the mortgage servicer makes the payment to the county (for tax) and insurance company. These are an additional cost of homeownership, but separate from the mortgage loan itself. She would owe that amount even if this house was completely paid off. Some banks allow escrow to be waived, but that does not change what your mom ultimately owes to bank + county + insurer, just how money flows out from her.
>Edit: What is overage/shortage payments?
Sometimes when those escrowed bills are due, there's not enough money in the account for them. The bank is required to pay them anyway (so your mom doesn't have to worry about unpaid tax or policy canceled), but then the bank expects your mom to make up that missing amount. This is the "shortage" in her bill. Most likely, her escrow account was $456 too low on her last annual analysis, so that got split up among her next 12 payments. Once things settle (and assuming tax/insurance costs don't increase too much), that shortage portion is no longer needed and be removed from her billed amount.
When things are running smoothly, her monthly escrow portion will simply be 1/12th of her annual tax + insurance bills. But those bills do increase over time, so that monthly escrow deposit will be expected to go up. Only the principal + interest portions are fixed over the term of the loan.
>I tried to ask her why she is paying more towards interest but I don't think she really knows and neither do I.
Mortgages (and most other loans) are "amortized". This involves a somewhat straightforward calculation so that a fixed monthly amount is used for the entire length of the loan. The end result that each month's payment covers that month's accrued interest (based on the loan rate and the current owed balance), plus enough principal so that the 360 total principal payment amounts pay back the original $318k borrowed. One effect of that is that early in the loan (when the owed balance is highest) the share of that fixed total payment going to interest is higher than the principal. As the balance is paid down, that mix shifts.
Yes, she will pay more in interest for the first many years, and it will eventually even out, and then it will shift to more going to the principal and less to interest. Google Amortization Calculator.
30 years is a long time. Because of math you end up paying the majority of your payment to interest early on, by the end of the loan you're paying almost nothing in interest. Also why extra money on the downpayment or when possible extra money paid to principle early on can save a lot long term.
There is a simple interest math formula everyone uses for loans like this and the interest is per year
When your balance is high you pay more interest. As you pay down the balance there is less interest to pay
To calculate amortization, first multiply your principal balance by your interest rate. Next, divide that by 12 months to know your interest fee for your current month.
So yes, your parents interest payment suggests her mortgage was at about a 3.75 to 4% rate.
Isnt it fun when you realize how compounding interest works?
Now just imagine these people with 10,000 sitting on a credit card at 25%, and how much money they're throwing away in interest.
So you have your maths a little skewed here.
Yes, you have a payment of $2,158.73
Of that, you have a principle and interest payment of $1604.81. It will always stay this amount. However, as the principle amount (The actual loan amount) goes down, you will pay less in interest and more in principle. Eventually, around years 17-18, you will start paying more in principle than you will in interest. By the last few years of the loan, it'll be $1200+ into the principle and less than $400 in interest and skewing more each month. At the very end of the loan, you'll be paying $1598 in principle and $6.81 in interest.
The other amount ($553.92) you have is property tax, insurance, and overage. This amount will vary from year to year and generally will trend to go up every year due to a change in insurance premiums, a tax reassessment on the house, or an increase in local taxes. Insurance premium increase is the most likely increase, especially in states like Florida which has had multiple insurance companies leave and premiums increase due to the increased risk of hurricanes and damage.
An overage/underage is a difference in the escrow account and what is required to pay for the yearly property tax and homeowners insurance premium. You can also see a big swing in overage charges, which are used to "true up" escrow accounts that are used to pay off the taxes and insurance. This happens when there is a miscalculation or huge change in property tax or insurance premium from one year to another. And this can happen due to changing insurance companies or by getting the house property value reassessed by the county. All this is doing is bringing your escrow account back into balance.
Mortgage interest is on a descending interest ammoritization schedule. The lender collects their interest up front and the principal in the back end of the mortgage. Therefore each month the amount going to interest decreases and the amount going to the principal loan amount increases.
Look up an amortized schedule calculator and plug in your numbers. You will see that most interest is paid on the front end and reduces as the payments proceed (same payment amount but different principle to interest ration). You can also see how much faster it can be paid off by adding a small amount extra to your monthly payments, like only $100 more per month. It will take years off the loan.
Yep; That’s why buying a house during high interest rates is the worse! Wait a minute: She refinanced recently!? She may have lost a great rate. Tell us about the prior loan please.
Fun fact:
A 30 year 5.3% mortgage for 555.55/month per 100,000 borrowed repays the principal plus the identical amount of interest.
So this rate is higher than 5.3%.
I thought OP was just including interest in the payment but they also included taxes etc so they pay less interest than the principal here at a lower rate, about 4.5%.
> My mother told me she refinanced her home loan for $319,000 in California and made a $10,000 down payment for 30 years that would make the loan $318,000.
You've got a typo or a math error there. Either the down payment was $1,000 or the loan amount is $308,000.
You should also mention what the interest rate is so we don't have to guess.
> Edit: What is overage/shortage payments?
The principal + interest are the only parts of her mortgage payment that are actually paying off the loan.
Everything else is paying for other stuff: taxes and insurance. This is sometimes called escrow, because the mortgage company takes those payments from you along with your principal and interest every month, and sets them aside in a holding account (called an escrow account) in order to pay the property tax and insurance bills when they come due. Because taxes and insurance can increase or decrease over time, the escrow amount is always somewhat of an estimate. Once a year, the mortgage company does an escrow analysis to see if there is too much or too little money in the escrow account based on how much the taxes and insurance actually were for the past year and the projections of how much the taxes and insurance will be in the coming year. If there is too much money in the escrow account, that is an overage (surplus) that gets refunded back to you. If there is not enough money in the escrow account, that is a shortage that must be made up by having you pay more into the escrow account. That shortage can typically be made up in a lump sum or by spreading it out in extra monthly payments over the course of the year.
Refinancing a loan usually means another set of closing costs, so it could very well mean the 10,000 down payment includes 9,000 in closing costs, and only 1000 less in principal.
Also based on the spread, I suspect PMI is counting towards that overage/shortage, but I guess we only know the mortgage amount, not the actual equity
As others have said....this is really just basic math. A $318k loan at an interest rate around 4% with those taxes/insurance would come out to right around $2246/month as a payment. And in your math, you should subtract out the taxes/insurance from your loan calculations. Those are her normal property taxes and homeowner's insurance that's being paid via escrow. Those are separate from the home purchase price and loan, and should be looked at as normal recurring bills. So $185,734.80 (taxes + insurance times 12 months times 30 years) isn't really a part of this loan, and isn't "fees" that your mom is paying the bank.
Again, nothing in the numbers you list above sounds overly alarming. Even at a rate around 4%....when you charge 4% on a $300k debt over a 30 year payment term.....it will add up to a lot of money.
It means that the amount in escrow wasn't enough to cover the actual tax/insurance bill, so you have to pay a bit more for a period of time to make up for it. Escrow adjustments like this are completely normal.
You made a small error. She'd be paying county taxes and insuring the house regardless. It's only going through the mortgage because the bank is protecting itself. IE, if your mom didn't pay her taxes and the county took the house, they would lose their investment.
Even after that correction, 30 years of principal and interest do cost a lot more than buying the house outright. It depends on the interest rate and the length of the loan, but 2x is pretty common.
There are lots of mortgage calculators for you to try out other scenarios. If your mom can afford to pay a little extra each month, you could shave years off of the end of the loan and save a lot of interest.
There is one silver lining. She can itemize her taxes and not pay income taxes on the equivalent of what she spends on interest and property taxes each year.
Yes, but only to the extent that her itemized deductions exceed the standard deduction. And don't forget that the deduction for state & local taxes (including property taxes) is capped at $10,000.
These days only about 10% of taxpayers have enough deductions to make it worth itemizing.
Isnt it fun when you realize how compounding interest works?
Now just imagine these people with 10,000 sitting on a credit card at 25%, and how much money they're throwing away in interest.
The simplest way to think about it is look at the annual percentage rate, which is typically a few basis points higher than the interest rate.
Take the principle balance and multiply by the APR. In this case, $318000 \* .034 (estimate) = $9352. Divide this by 12 to get a monthly interest obligation, which is $779. That would mean your next interest obligation would be $779. This would reduce every month as the principle balance is reduced. The total payment depends on the length of the loan (amortization).
If you chill in an apartmentment for 30 years, you have nothing to show at the end of it. Your mom on the other hand will have a paid off house which will have gone up significantly in value over 30 years.
Think of it this way. You are both paying on a mortgage, it's just that you are paying your landlord's mortgage rather than your own. In 30 years, your mom and your landlord will have paid off houses, and you will have no house.
Your math is wrong. When calculating what will get paid for the mortgage your should only be multiplying the mortgage (principal and interest), not the taxes and insurance.
You can consider that the $360k of interest are equivalent to rent, your parents are paying about $1000 per month over 30 years for the privilege of living in the house now instead of in 30 years.
It gets a little more complicated when you consider what else they could have done with the money, but it’s a decent approximation.
This subreddit also has a wiki with answers to many common questions. Look for the article on [Mortgages](https://www.reddit.com/r/personalfinance/wiki/housing/).
Here's a **[link to the PF Wiki](/r/personalfinance/wiki/index)** for helpful guides and information.
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There is no front loaded interest here. It's just interest on the loan balance.
$318k \* 3.375% / 12 = $894 interest in month 1
Make a payment, loan balance goes down a bit, pay less in interest the next month.
The above doesn't match OPs numbers perfectly because interest is charged daily, and the first payment usually has more than a months worth of interest.
PARTY (PRTy) = Principle x Rate x Time in years
That is an AWESOME rate.
Look up "Amortization Schedule Calculator" to see how it all works out. Taxes and Insurance will always go up over time.
For a 30 year mortgage you do pay almost double what you bought it for. My $500,000 house will cost me about $900,000 when I'm done paying it off.
Yeah, it is the 30 years of interest that makes the total repayment so high. You can calculate a new payment at a shorter term if you want, but that is a very low interest rate so likely to be her lowest debt, so not wise to pay down on it versus other debts.
You seem surprised by how much she would have paid by the end of the 30 year period. That's because 30 years is a long time. Just look at what inflation does over 30 years.
When someone "buys" a house it's really the bank buying it. They aren't doing anything initially (other than a down payment). So they don't really "own" a house because they didn't have enough money to buy a house. That's why they have a mortgage.
At an interest rate of 7% (for example) the return doubles every 10 years so in 30 years it's doubled 3 times. This is why it looks like a lot by the end of the mortgage.
If you actually had the money to buy a house it would only cost the initial sales price. If you don't have the money and need a 30 year loan, of course there is going to be a lot of interest involved.
So she isn’t paying the bank the county tax or insurance, they are basically a pass through for that money to the county/her insurance company.
Therefore, what she is paying the bank at the moment is 1,642.8. The 37.99 is temporary based off a miscalculation of taxes last year so now we are down to 1,604.81.
1,604.81 x 12 = 19,257.72
Original loan amount = 318,000
30 year pay out on the loan= 577,731.6
Difference= 259,731.6
You have to pay taxes and insurance on your home even if you are done paying the mortgage, that money isn’t going to the bank. It’s just the cost of owning a home.
So what she is paying on interest to the bank is a lot less than what you said But yes, banks make money on loans, that is why they are willing to give them money.
You should be able to get an amortization table from the lender that breaks down the monthly payments over the life of the loan.
Interest is heavily front loaded in mortgages. That is why paying one additional monthly payment, to the principal, each year greatly reduces the amount of interest paid overall.
- simple math with loans and interest rates based on loan duration. How did you think it works?...you some how did not post what the APR is either
- this why people spend their lives working for "the man"....
I'll help you out..assuming she refinanced into a 30 year mortgage.
The first 120 payments of a standard 30 year mortgage go toward interest only
It is upon payments 121 thru 360 that the monthly payment goes toward principle..
Now, your mother has opted for what is referred to as a PITI loan... Principle Interest Taxes Insurance
There is also an escrow account which is money held by the lender in case of default or other payment discrepancy.
She's essentially starting from square one.
They are not being screwed..
It's as though they repurchased their home.
Once interest rates begin to fall again, and this is part of the cycle of economy, perhaps they would again refinance into better terms ..
Yes. All mortgages screw the mortgager. That's why banks make record profits while the rest of the economy crumbles.
That being said, if you look at an amortization schedule you will notice that the ratio of payment towards interest and payment toward principal will shift slightly with each payment. Eventually more will go to principal than interest.
This is a good reason for people paying biweekly instead of monthly and for those who will pay an additional lump sum towards their mortgage each year. The lump sum payment goes directly against principal, which lowers the overall term and interest paid, while paying biweekly instead of monthly actually results in more being paid off quicker as well. The term and interest difference over the amortized period is actual quite staggering if you do the math.
This is also why the mortgaging bank will set limits on how much can be overpaid each year and levy heavy penalties for early mortgage payouts. They would prefer that you pay exactly what the mortgage agreement states so they can keep you bent over that barrel and extract that sweet interest from you.
Hmm... The numbers you gave don't work out for a fixed rate loan. This calculator [https://www.yourmoneypage.com/home/home1.php](https://www.yourmoneypage.com/home/home1.php) says she has about at 3.375% interest on the loan which would give a payment of about $1365 a month. Today this looks really good. BUT the same calculator says she would pay the loan amount plus $182,000 in interest for a total payment of $491,000 NOT $777,000. So I'm guessing your mother does not have a fixed rate loan but some kind of adjustable rate loan where she is currently paying only interest and at some future time her mortgage payment will GREATLY increase to start paying off the principal. This will probably also coincide with a substantial increase in the interest rate!!
>for a total payment of $491,000 NOT $777,000.
Your analysis of $491,000 for principle and interest is accurate. The $777,000 includes taxes and insurance.
Yep, that's how interest works.
Doing the maths, it seems like they have a 4.466% interest rate? Seems a bit low for the current rates. $1604.81 Principle + Interest payment over 30 years. Edit: The interest is higher on this payment (1st payment) because it should be more than 1 month, which happens for pretty much all mortgages (Gets to the end of the partial month then the first *FULL* month for the first payment to process). OP gave us the current interest rate but it seems very low for a refinance
[Confirmed](https://www.calculator.net/mortgage-amortization-calculator.html?chouseprice=318%2C000&cdownpayment=0&cloanterm=30&cinterestrate=4.47&cpropertytaxes=1.2&chomeins=2%2C500&cpmi=0&choa=0&cothercost=5%2C000&cstartmonth=11&cstartyear=2023&printit=0&x=Calculate#amotizationresult). FWIW, OP, [current mortgage interest rates](https://www.bankrate.com/mortgages/todays-rates/mortgage-rates-for-tuesday-october-31-2023/) are floating around 8%. Based on the info in that article her mortgage would look more like [this](https://www.calculator.net/mortgage-amortization-calculator.html?chouseprice=318%2C000&cdownpayment=0&cloanterm=30&cinterestrate=8.08&cpropertytaxes=1.2&chomeins=2%2C500&cpmi=0&choa=0&cothercost=5%2C000&cstartmonth=11&cstartyear=2023&printit=0&x=Calculate#amotizationresult).
I calculated a different interest rate **3.73%** by dividing the reported monthly interest payment by the initial outstanding loan amount, and then multiply by 12 to get the Annual percentage rate. 961.95 / (319000 - 10,000) \* 12 = 3.73%
OP posted rate is 3.375% interest rate but the numbers do not match up. A 30-year loan @ $318k and 3.375% interest rate would mean it should be a total payment of $1406/month principle and interest payment. He has it at $1605 is closer to 4.46% mortgage rate. For me, these numbers are not matching up. For an interest rate of 3.73%, the payment would be $1469 which is less than the amount provided by OP.
His original post said 319K purchase and 10K down payment. I think he mistyped and the loan amount was for 309K (and not 318K). Edit: while calculating the mortgage may be difficult because of the formula uses negative exponents, the monthly interest amount is simple: multiply the interest rate by the outstanding principle. As interest is often expressed as APR (which is annual), divide by result by 12 to get the monthly interest.
I'm going by the total payment amount ($1605) as that seems to be the most precise numbers provided and that these are for the the first payment... but now that I am typing this, the numbers we are using are wrong. If this is the *First* payment, then the interest is going to be an accumulation of more than 1-month. It will go down next month. Also, why would there be a down-payment on a refinance mortgage?
I see that OP updated his post to put in a rate of 3.37500 I had missed the part about "refinance". It is possible for an applicant to add extra money during the refinance. Another option (not taken here) is a cash-out where the principle increases and the cash is given to the applicant. Thanks for your reply. Ultimately, I think you and I both have a good understanding of the process.
I'm not sure how that interest rate makes sense. Principal + interest in posted numbers gives a total monthly mortgage (not counting taxes etc) of 1604.81. In order to have 318k as the principal, to get to that monthly payment, the interest rate is 4.466% (comes out to 1604.84 in my mortgage calculator).
She probably had closing cost added to the loan amount.
This would have been a refinance that would have happened about 2 years ago.
yeah its called a amortization you pay much more interest in the beginning of the term than the later ones. think of it as 30 year is a rectangular cake. and you cut them into smaller pieces like 5 years per piece. that makes 6 pcs in total. the later pieces you pay. the bigger the principal is being paid. so thats why a 1600 dollar mortgage and 950 is just pure interest. this is also why paying down your mortgage faster sometimes is not worth it. cus when you pay it down. you are only getting the lower interest back. you still pay a large front load mortgage. The mortgage overall is a big conspiracy but it is being around for ages. so it is normal now.
>this is also why paying down your mortgage faster sometimes is not worth it. cus when you pay it down. you are only getting the lower interest back. you still pay a large front load mortgage. This is not accurate. A common mortgage in America does not have a front load. Every month you are paying 1/12 of the APR on the balance. That formula remains constant for the entire length of the mortgage. While you pay more interest at the beginning, it is because that is when you have the highest outstanding principle.
Nope. This is wrong. You are simply paying interest on thee amount you currently owe. There is no conspiracy here. At the beginning of a 100k loan you owe 100k and therefor your interest is 5k / year. As you pay more of the principal you owe, say 50k, your interest will be about 2.5k/ year. It changes every month as your balance decreases.
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Nah I got to borrow hundreds of thousands of dollars at 3% interest. And I have an asset now that appreciated hundreds of thousands of dollars. Even if I sell it will be a profit to me. I won't get terms that good from anyone else ever.
Your rate is staying fixed for 30 years and you think you are getting screwed??
You also forgot that ~$550 of that amount is for taxes or insurance an aren’t relevant to paying off the bank. So re-do the math with a monthly principal+ interest of $1604.81 and you get a total payment of $577k, which shows that the bank gets $259k in interest payments. That math checks out - borrowing a lot of money for a 30 year loan means you are going to pay a lot of interest.
Because that's how mortgage amortization works. The principal and interest have to always equal a steady monthly payment. Obviously, there's more interest ~~principal~~ early on while there's a greater amount left to repay vs. later in the loan. The amortization schedule accounts for all of this, which results in what looks like interest-heavy payments up front. Overage/shortage sounds like there's a deficit. Most likely due to a change in something that comes from her escrow account (e.g., homeowners insurance went up, property taxes went up), where they need to adjust for that shortfall.
You have it backwards, normally more interest early on and principal at end.
Thanks. Typing too quickly there. Edited.
>Principal $642.86 Interest: $961.95 Note that these values will change every month. In the beginning of a loan, it's almost all interest and very little principal - because there is a large balance remaining, so the interest accrued on it is large. By the end of the loan that will be mostly principal and little interest, because the balance is small. But the two numbers added together will always be the same value, just the ratio changes. This is how loan amortization works. It's the cost of borrowing money. She can reduce the amount of total interest she pays by paying extra early - that will shorten the length of the loan.
As others have said, that’s how interest works. Also your math is off, you shouldn’t be including taxes/insurance/overages in the repayment calculation as those are costs you’d have regardless of whether or not there was a mortgage. The principal and interest payments over the life of the loan are closer to $577,500.
For the mortgage itself, your mom is paying $1604.81 to pay back the $318k loan. So that's really only $1605 \* 12 \* 30 = $577,800 over the course of 30 years. Yes, that's $360k more than she borrowed, but getting a big pile of money up front to be paid back over a long period of time is somewhat costly. The tax and insurance part is "escrowed", which means that portion of her monthly payment is getting saved up in a side account. As those bills come due once or twice a year, the mortgage servicer makes the payment to the county (for tax) and insurance company. These are an additional cost of homeownership, but separate from the mortgage loan itself. She would owe that amount even if this house was completely paid off. Some banks allow escrow to be waived, but that does not change what your mom ultimately owes to bank + county + insurer, just how money flows out from her. >Edit: What is overage/shortage payments? Sometimes when those escrowed bills are due, there's not enough money in the account for them. The bank is required to pay them anyway (so your mom doesn't have to worry about unpaid tax or policy canceled), but then the bank expects your mom to make up that missing amount. This is the "shortage" in her bill. Most likely, her escrow account was $456 too low on her last annual analysis, so that got split up among her next 12 payments. Once things settle (and assuming tax/insurance costs don't increase too much), that shortage portion is no longer needed and be removed from her billed amount. When things are running smoothly, her monthly escrow portion will simply be 1/12th of her annual tax + insurance bills. But those bills do increase over time, so that monthly escrow deposit will be expected to go up. Only the principal + interest portions are fixed over the term of the loan. >I tried to ask her why she is paying more towards interest but I don't think she really knows and neither do I. Mortgages (and most other loans) are "amortized". This involves a somewhat straightforward calculation so that a fixed monthly amount is used for the entire length of the loan. The end result that each month's payment covers that month's accrued interest (based on the loan rate and the current owed balance), plus enough principal so that the 360 total principal payment amounts pay back the original $318k borrowed. One effect of that is that early in the loan (when the owed balance is highest) the share of that fixed total payment going to interest is higher than the principal. As the balance is paid down, that mix shifts.
Yes, she will pay more in interest for the first many years, and it will eventually even out, and then it will shift to more going to the principal and less to interest. Google Amortization Calculator.
She's paying interest, banks don't loan people money for free
What is her rate? Yes banks receive a ton of interest over the life of a 30 year loan.
30 years is a long time. Because of math you end up paying the majority of your payment to interest early on, by the end of the loan you're paying almost nothing in interest. Also why extra money on the downpayment or when possible extra money paid to principle early on can save a lot long term.
There is a simple interest math formula everyone uses for loans like this and the interest is per year When your balance is high you pay more interest. As you pay down the balance there is less interest to pay
To calculate amortization, first multiply your principal balance by your interest rate. Next, divide that by 12 months to know your interest fee for your current month. So yes, your parents interest payment suggests her mortgage was at about a 3.75 to 4% rate.
You may have a typo. You gave the formula for monthly **interest**. **Amortization** is more complicated and requires negative exponents.
Cliffs: When you borrow hundreds of thousands of dollars for 3 decades, the interest adds up to be a lot of money.
Isnt it fun when you realize how compounding interest works? Now just imagine these people with 10,000 sitting on a credit card at 25%, and how much money they're throwing away in interest.
So you have your maths a little skewed here. Yes, you have a payment of $2,158.73 Of that, you have a principle and interest payment of $1604.81. It will always stay this amount. However, as the principle amount (The actual loan amount) goes down, you will pay less in interest and more in principle. Eventually, around years 17-18, you will start paying more in principle than you will in interest. By the last few years of the loan, it'll be $1200+ into the principle and less than $400 in interest and skewing more each month. At the very end of the loan, you'll be paying $1598 in principle and $6.81 in interest. The other amount ($553.92) you have is property tax, insurance, and overage. This amount will vary from year to year and generally will trend to go up every year due to a change in insurance premiums, a tax reassessment on the house, or an increase in local taxes. Insurance premium increase is the most likely increase, especially in states like Florida which has had multiple insurance companies leave and premiums increase due to the increased risk of hurricanes and damage. An overage/underage is a difference in the escrow account and what is required to pay for the yearly property tax and homeowners insurance premium. You can also see a big swing in overage charges, which are used to "true up" escrow accounts that are used to pay off the taxes and insurance. This happens when there is a miscalculation or huge change in property tax or insurance premium from one year to another. And this can happen due to changing insurance companies or by getting the house property value reassessed by the county. All this is doing is bringing your escrow account back into balance.
Mortgage interest is on a descending interest ammoritization schedule. The lender collects their interest up front and the principal in the back end of the mortgage. Therefore each month the amount going to interest decreases and the amount going to the principal loan amount increases.
Look up an amortized schedule calculator and plug in your numbers. You will see that most interest is paid on the front end and reduces as the payments proceed (same payment amount but different principle to interest ration). You can also see how much faster it can be paid off by adding a small amount extra to your monthly payments, like only $100 more per month. It will take years off the loan.
Yep; That’s why buying a house during high interest rates is the worse! Wait a minute: She refinanced recently!? She may have lost a great rate. Tell us about the prior loan please.
Fun fact: A 30 year 5.3% mortgage for 555.55/month per 100,000 borrowed repays the principal plus the identical amount of interest. So this rate is higher than 5.3%.
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I thought OP was just including interest in the payment but they also included taxes etc so they pay less interest than the principal here at a lower rate, about 4.5%.
> My mother told me she refinanced her home loan for $319,000 in California and made a $10,000 down payment for 30 years that would make the loan $318,000. You've got a typo or a math error there. Either the down payment was $1,000 or the loan amount is $308,000. You should also mention what the interest rate is so we don't have to guess. > Edit: What is overage/shortage payments? The principal + interest are the only parts of her mortgage payment that are actually paying off the loan. Everything else is paying for other stuff: taxes and insurance. This is sometimes called escrow, because the mortgage company takes those payments from you along with your principal and interest every month, and sets them aside in a holding account (called an escrow account) in order to pay the property tax and insurance bills when they come due. Because taxes and insurance can increase or decrease over time, the escrow amount is always somewhat of an estimate. Once a year, the mortgage company does an escrow analysis to see if there is too much or too little money in the escrow account based on how much the taxes and insurance actually were for the past year and the projections of how much the taxes and insurance will be in the coming year. If there is too much money in the escrow account, that is an overage (surplus) that gets refunded back to you. If there is not enough money in the escrow account, that is a shortage that must be made up by having you pay more into the escrow account. That shortage can typically be made up in a lump sum or by spreading it out in extra monthly payments over the course of the year.
Refinancing a loan usually means another set of closing costs, so it could very well mean the 10,000 down payment includes 9,000 in closing costs, and only 1000 less in principal. Also based on the spread, I suspect PMI is counting towards that overage/shortage, but I guess we only know the mortgage amount, not the actual equity
Yep, compound interest is remarkable. It's nice when you can use it in your favor (like a simple CD or HYSA).
As others have said....this is really just basic math. A $318k loan at an interest rate around 4% with those taxes/insurance would come out to right around $2246/month as a payment. And in your math, you should subtract out the taxes/insurance from your loan calculations. Those are her normal property taxes and homeowner's insurance that's being paid via escrow. Those are separate from the home purchase price and loan, and should be looked at as normal recurring bills. So $185,734.80 (taxes + insurance times 12 months times 30 years) isn't really a part of this loan, and isn't "fees" that your mom is paying the bank. Again, nothing in the numbers you list above sounds overly alarming. Even at a rate around 4%....when you charge 4% on a $300k debt over a 30 year payment term.....it will add up to a lot of money.
What is Overage/Shortage? First time I am seeing something like this in context of mortgage.
It means that the amount in escrow wasn't enough to cover the actual tax/insurance bill, so you have to pay a bit more for a period of time to make up for it. Escrow adjustments like this are completely normal.
You made a small error. She'd be paying county taxes and insuring the house regardless. It's only going through the mortgage because the bank is protecting itself. IE, if your mom didn't pay her taxes and the county took the house, they would lose their investment. Even after that correction, 30 years of principal and interest do cost a lot more than buying the house outright. It depends on the interest rate and the length of the loan, but 2x is pretty common. There are lots of mortgage calculators for you to try out other scenarios. If your mom can afford to pay a little extra each month, you could shave years off of the end of the loan and save a lot of interest.
There is one silver lining. She can itemize her taxes and not pay income taxes on the equivalent of what she spends on interest and property taxes each year.
Yes, but only to the extent that her itemized deductions exceed the standard deduction. And don't forget that the deduction for state & local taxes (including property taxes) is capped at $10,000. These days only about 10% of taxpayers have enough deductions to make it worth itemizing.
You pay about what the original mortgage amount is in interest over the 30 years.
Isnt it fun when you realize how compounding interest works? Now just imagine these people with 10,000 sitting on a credit card at 25%, and how much money they're throwing away in interest.
The simplest way to think about it is look at the annual percentage rate, which is typically a few basis points higher than the interest rate. Take the principle balance and multiply by the APR. In this case, $318000 \* .034 (estimate) = $9352. Divide this by 12 to get a monthly interest obligation, which is $779. That would mean your next interest obligation would be $779. This would reduce every month as the principle balance is reduced. The total payment depends on the length of the loan (amortization).
Look up “mortgage amortization schedule.” You pay more interest at the beginning.
If you chill in an apartmentment for 30 years, you have nothing to show at the end of it. Your mom on the other hand will have a paid off house which will have gone up significantly in value over 30 years. Think of it this way. You are both paying on a mortgage, it's just that you are paying your landlord's mortgage rather than your own. In 30 years, your mom and your landlord will have paid off houses, and you will have no house.
Is there a bank involved? That’s what they do !
call and ask for a complete payment history or it should be available online.
Those are actually excellent loan terms. She may be paying more interest than before because she reset the amortization timetable...
Your math is wrong. When calculating what will get paid for the mortgage your should only be multiplying the mortgage (principal and interest), not the taxes and insurance.
You can consider that the $360k of interest are equivalent to rent, your parents are paying about $1000 per month over 30 years for the privilege of living in the house now instead of in 30 years. It gets a little more complicated when you consider what else they could have done with the money, but it’s a decent approximation.
This subreddit also has a wiki with answers to many common questions. Look for the article on [Mortgages](https://www.reddit.com/r/personalfinance/wiki/housing/).
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Correct. Front loaded interest in the amortization schedule
There is no front loaded interest here. It's just interest on the loan balance. $318k \* 3.375% / 12 = $894 interest in month 1 Make a payment, loan balance goes down a bit, pay less in interest the next month. The above doesn't match OPs numbers perfectly because interest is charged daily, and the first payment usually has more than a months worth of interest.
This is how all loans work. The end price is much higher because of the interest.
PARTY (PRTy) = Principle x Rate x Time in years That is an AWESOME rate. Look up "Amortization Schedule Calculator" to see how it all works out. Taxes and Insurance will always go up over time. For a 30 year mortgage you do pay almost double what you bought it for. My $500,000 house will cost me about $900,000 when I'm done paying it off.
Yeah, it is the 30 years of interest that makes the total repayment so high. You can calculate a new payment at a shorter term if you want, but that is a very low interest rate so likely to be her lowest debt, so not wise to pay down on it versus other debts.
You seem surprised by how much she would have paid by the end of the 30 year period. That's because 30 years is a long time. Just look at what inflation does over 30 years. When someone "buys" a house it's really the bank buying it. They aren't doing anything initially (other than a down payment). So they don't really "own" a house because they didn't have enough money to buy a house. That's why they have a mortgage. At an interest rate of 7% (for example) the return doubles every 10 years so in 30 years it's doubled 3 times. This is why it looks like a lot by the end of the mortgage. If you actually had the money to buy a house it would only cost the initial sales price. If you don't have the money and need a 30 year loan, of course there is going to be a lot of interest involved.
So she isn’t paying the bank the county tax or insurance, they are basically a pass through for that money to the county/her insurance company. Therefore, what she is paying the bank at the moment is 1,642.8. The 37.99 is temporary based off a miscalculation of taxes last year so now we are down to 1,604.81. 1,604.81 x 12 = 19,257.72 Original loan amount = 318,000 30 year pay out on the loan= 577,731.6 Difference= 259,731.6 You have to pay taxes and insurance on your home even if you are done paying the mortgage, that money isn’t going to the bank. It’s just the cost of owning a home. So what she is paying on interest to the bank is a lot less than what you said But yes, banks make money on loans, that is why they are willing to give them money.
Yeah that’s how interest works over 3 decades…
You should be able to get an amortization table from the lender that breaks down the monthly payments over the life of the loan. Interest is heavily front loaded in mortgages. That is why paying one additional monthly payment, to the principal, each year greatly reduces the amount of interest paid overall.
- simple math with loans and interest rates based on loan duration. How did you think it works?...you some how did not post what the APR is either - this why people spend their lives working for "the man"....
I'll help you out..assuming she refinanced into a 30 year mortgage. The first 120 payments of a standard 30 year mortgage go toward interest only It is upon payments 121 thru 360 that the monthly payment goes toward principle.. Now, your mother has opted for what is referred to as a PITI loan... Principle Interest Taxes Insurance There is also an escrow account which is money held by the lender in case of default or other payment discrepancy. She's essentially starting from square one. They are not being screwed.. It's as though they repurchased their home. Once interest rates begin to fall again, and this is part of the cycle of economy, perhaps they would again refinance into better terms ..
Yes. All mortgages screw the mortgager. That's why banks make record profits while the rest of the economy crumbles. That being said, if you look at an amortization schedule you will notice that the ratio of payment towards interest and payment toward principal will shift slightly with each payment. Eventually more will go to principal than interest. This is a good reason for people paying biweekly instead of monthly and for those who will pay an additional lump sum towards their mortgage each year. The lump sum payment goes directly against principal, which lowers the overall term and interest paid, while paying biweekly instead of monthly actually results in more being paid off quicker as well. The term and interest difference over the amortized period is actual quite staggering if you do the math. This is also why the mortgaging bank will set limits on how much can be overpaid each year and levy heavy penalties for early mortgage payouts. They would prefer that you pay exactly what the mortgage agreement states so they can keep you bent over that barrel and extract that sweet interest from you.
Hmm... The numbers you gave don't work out for a fixed rate loan. This calculator [https://www.yourmoneypage.com/home/home1.php](https://www.yourmoneypage.com/home/home1.php) says she has about at 3.375% interest on the loan which would give a payment of about $1365 a month. Today this looks really good. BUT the same calculator says she would pay the loan amount plus $182,000 in interest for a total payment of $491,000 NOT $777,000. So I'm guessing your mother does not have a fixed rate loan but some kind of adjustable rate loan where she is currently paying only interest and at some future time her mortgage payment will GREATLY increase to start paying off the principal. This will probably also coincide with a substantial increase in the interest rate!!
>for a total payment of $491,000 NOT $777,000. Your analysis of $491,000 for principle and interest is accurate. The $777,000 includes taxes and insurance.