Why doesn't the balance of my mortgage change much during the first several years of the loan?
Many people misunderstand why this is happening, but the reason is simple. You owe the bank a lot more at the beginning of the loan than at the end.
Here’s an example:
Assume $200,000 is borrowed for 30 years at 6.62%. The monthly payment would be $1,279.96. To calculate the interest owed for the first month, we use the simple interest formula:
Interest = Principal * Rate * Time
I = $200,000(0.0662)(1/12) $1,103.33
If $1,103.33 is going towards interest, the remaining $176.63 ($1,279.96 - $1,103.33) is going toward the principal or balance of the loan. The principal for the second month calculation is $200,000 - $176.63 = $199,823.27. Repeating the calculation above with this number for P will yield slightly less towards interest and slightly more towards principal.
At some point, depending on the length of the term, the amount owed drops to a point where more is going towards principal than interest. That’s when you really notice the balance decreasing more quickly.
