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ilovedodge2

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how do i find out why I am still paying a lot of interest on the loan for my home
I am still paying a lot of interest on the loan for my home. 7% is our interest rate we put 10 thousand down and have been paying on it for 17 years. With extra on the payments. It just seems we are still paying the same amount of interest. By now I thought we would be paying more on the principle.

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     Loan payments are made up of a number of items lumped into one number.  The base components are Principal and Interest. Most loans will also incorporate an escrow payment to collect money to make property tax and insurance payments.  In addition to that you may have Private Mortgage Insurance (PMI) added on top.  (You probably don't have PMI payments anymore since you've been paying for 17 years).

     You are asking about the amount of interest you are paying, so let's ignore the escrow and PMI and focus just on Principal and Interest (P&I).  Go to google and search for a mortgage calculator.  There are a bunch out there, I like the one on bankrate, but most will do the job.  Plug in the numbers from your mortgage and look for the amortization schedule.  This will show you the split between how much of the payment is going to principal and how much is going to interest.

     What we see is that in the first few years, very little of the payment goes to principal.  In fact on a 30 year loan at 7% you'll have only paid off about 25% of the principal after 15 years.  On a $100k loan, the monthly payment on a 30 year loan at 7% is $665.30 per month (again, just P&I).  On your first payment, only $81.97 goes to principal and the rest ($583.33) just pays what you owe on the interest.  The next month the principal portion only goes up by 48 cents.

     Ok, so how does this happen?  Well it's really pretty simple math to understand how much interest is owed each month:

Multiply the Amount Owed x Annual Interest Rate / 12 Months

$100,000 x 0.07 / 12 = 583.33

So if you make the scheduled payment of $665.30, paying off $81.97, next month the calculation looks like this

($100,000-$81.97) x 0.07 / 12 = $582.85  (And the amount you’re paying off goes up to $82.45)

The only way to make the principal pay off number go up faster is to make additional principal payments.  Since you are at a 7% rate, you may want to seriously look into refinancing your mortgage to a 15-year fixed rate loan.  If your credit is good you can probably get a rate around 4% (less if your credit is great, more if not so hot).

So let’s look draw a comparison to your situation.  You have paid for 17 years on a 30 year loan and likely have about 66% of your original loan balance left.  If we assume your original loan was for $100k with a P&I payment of $665.30, here’s what your future looks like:

13 Years x 12 Payments per year x $665.30 = $103,786.80 left to pay

If you refinanced to a 15 year loan at 4% here’s what it looks like:

15 Years x 12 Payments per year x $493.12 = $88,761  (Saving $15,025.20)

If you kept your payment at the same $665.30, you’d pay off the loan in 10 years and 3 months and save even more money.

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You need to contact your mortgage company and ask them about it.

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