Higher Mortgage Rates Mean Principal Repayment Has Slowed to a Crawl

I remember when I wrote my mortgage myths post, I pointed out that mortgages aren’t mostly interest.

But I did so when mortgage rates were near record low levels, which may have skewed the answer.

It’s true that for most of the past century, mortgages haven’t been mostly interest. More has gone toward principal repayment than interest.

However, now that interest rates are closer to 7%, this is no longer true if the loan is held to maturity.

In addition, it means it takes a whole lot longer for principal to exceed interest on a monthly basis. Something you should know if you’re thinking of buying a home today.

Monthly Mortgage Payments Stay the Same, But There’s a Shift in Principal and Interest

The way mortgage amortization works on a fixed-rate mortgage, you enjoy the same monthly payment each month for the entire loan term.

For example, consider a $400,000 loan amount set at 6.75% on a 30-year fixed; the principal and interest payment is $2,594.39 per month for 360 months.

It doesn’t change. However, the payment composition does. Because the loan balance shrinks each month with a portion of the payment going to principal, you owe less interest the next month.

Simply put, smaller outstanding balance, less interest due. Fairly straightforward concept.

When mortgage rates were low, a huge portion of the monthly payment went toward principal (because the rate of interest was low).

However, as we all know, mortgage rates aren’t so low anymore. Gone are the days of 2-3% mortgage rates.

Instead, you might be facing a rate of 6.75%, or even something in the 7s. Aside from having a higher monthly payment, much less of your payment goes toward principal early on.

And much more goes toward interest since you have a higher rate of interest.

Nearly 90% of Your First Mortgage Payment Goes Toward Interest

Of that $2,594.39 total, a staggering $2,250.00 goes toward interest in month one. In other words, about 87% of your total payment is interest!

Not great if you’re looking to pay down your mortgage anytime soon.

Contrast that to someone with a $300,000 loan amount set at 2.65%. Their monthly would be $1,208.89 and the first payment would be only $662.50 in interest.

They’d still pay less principal than interest for a while, but it’d be a lot more balanced from the get-go.

We’re talking $546.39 in principal in month one, representing about 45% of the payment. This means nearly half of the payment is already going toward paying back the loan.

Instead of being pocketed by the mortgage lender as profit!

What this means is those who purchased homes five years ago, at much lower asking prices to boot, are enjoying much faster mortgage repayment.

They are benefiting from smaller loan amounts, lower interest rates, and a higher percentage of mortgage principal in every payment.

Meanwhile, recent home buyers who paid much more for the properties and who got saddled with much higher rates are seeing mortgage repayment basically come to a crawl.

Picture a rabbit and a snail, but the rabbit actually wins this one.

It Can Take 20 Years for the Majority of Your Monthly Payment to Not Go Toward Interest!

In fact, it’s not until year 20 or so that these recent home buyers are seeing the principal portion of the payment exceed interest.

This came to my attention when HousingWire’s Mike Simonsen posted a neat graph on X that showed 2021 home buyers (or refinancers) would be hitting that tipping point around now.

So they’re already enjoying payments that are majority principal after just 48 months or so.

Meanwhile, recent buyers will have to wait about two full decades to get there.

And on aggregate, they’ll wind up paying more in interest than the original loan amount if the mortgage is held until maturity.

This is why I wrote recently that if you plan to buy a home today, expect to hold it for a lot longer.

Essentially, your mortgage is being paid down a lot more slowly thanks to the higher interest rate.

At the same time, home prices are arguably pretty high and not expected to go up a ton anytime soon.

Taken together, you’ve got a situation where if you put little down, say 3.5% with an FHA loan, you might need more time before you can sell again.

Remember, transaction costs can be pretty steep, as high as 10% of the sales price to unload between taxes, title, escrow, and real estate agent commissions.

So home buyers today are at another disadvantage aside from having to accept a much higher mortgage rate and purchase price.

Something to consider if you’re buying today. You can’t buy on a whim anymore and expect to sell for a fat profit in 12 months.

There’s Now a Stronger Argument to Pay Extra Each Month

With these changes comes the argument to pay extra toward the mortgage each month.

After all, it’s no longer a screaming deal to keep your mortgage for the full 30 years.

Yes, mortgages are considered good debt, but a little less good when the interest rate is 6-7% or higher.

To combat this, you can pay extra each month, or you can create your own free biweekly mortgage payment system.

In the process, you can speed up the repayment of your mortgage, while also reducing the interest expense.

This can make it so your home loan acts like a lower-rate mortgage, and if you pay enough, get the principal to exceed interest again.

Not just on a monthly basis, but also over the entire loan term.

For example, pay an extra $500 per month using my example from above and you’d be paying more toward principal starting in year nine.

And total interest would be around $316,500, less than the $400,000 borrowed. Instead of it being over $530,000 in interest!

Read on: Should I pay off my mortgage early?

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 19 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on X for hot takes.

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