Why don’t mortgage payments decrease each month to reflect the lower balance on the principal?


Why don’t mortgage payments decrease each month to reflect the lower balance on the principal?

In: Economics

Because instead of doing that you are paying off the principal faster and faster.

Mortgages are designed to last for a certain period of time. The payments are engineered so that the loan lasts that period of time with consistent payments. So early payments will mostly be covering interest plus some principal, but each payment makes the interest payment smaller (less balanced requiring interest) while the principal payment gets larger.

The interest to principal ratio changes each payment. So the amount of interest you pay each month goes down.

The interest is front loaded on a traditional mortgage to benefit the bank to protect them from people defaulting on the loan

Cars loans are the same way.

Think of it like this: at the start of the mortgage, the total amount of interest you will pay over the next 30 years is calculated. You are going to pay that amount. They just alter how much of that you pay early on.

Normally, you can also pay more toward the principal if you want that to go down faster. You can even structure that as part of a different kind of loan.

Because you are not paying down any principle until the last half or less of you making payments. Mortgages are designed with a fixed interest rate and a set age limit and thus they calculate all interest first and you pay that off first.

if you would pay (say) 1% of the principal each year (and the rest is the interest for that year), paying the next year again 1% of the reduced principal would be a bad idea: Each and every payment would be a fixed fraction of the principal. The loan would simple run forever, you would never pay the remaining principal in full.

It makes more budget sense to have them equal than start high and get lower, so they calculate the total amount you’ll owe and divide by the months of the mortgage. As you keep paying, the amount that goes to interest goes down and amount going to pay down principal goes up.