Lesson 12 of 25 · 7 min
Why the early years are mostly interest
Early years are mostly interest because the unpaid principal is still almost the whole loan.
The schedule's shape is not a quirk of housing. It is accrual on a large unpaid principal. Track 1 lesson 14 hides daily accrual inside a monthly statement; the statement prints one charge and the days disappear. A mortgage statement prints one installment and the split disappears. Pull the split out and the early years are mostly interest, because the balance the interest is charged on is still almost P.
Year 1 on the Marrow Street book: $21,011.06 paid, $17,579.44 interest, 83.7 percent. After 5 years, $19,470.79 of principal is gone from $287,400, which is 6.8 percent. After 15 years, $81,888.46 is gone, which is 28.5 percent. Half the term has not retired half the loan. Fifteen years, 50 percent of the months, have retired 28.5 percent of P. The other 71.5 percent is still accruing.
The installment formula forces equal cash figures. It does not force equal principal figures. Equal cash on a shrinking balance means the interest leg must fall and the principal leg must rise. That crossing happens late, because it takes a long time for $278.00 a month, lesson 2's first principal slice, to compound into a dent in $287,400. Each month's interest is r times whatever is still there. Early on, what is still there is nearly everything.
A securities line with a young, fully drawn balance shows the same domination: most of the period's charge is accrual on a principal that has not yet been reduced. The mortgage version is slower and scheduled. The geometry does not change. Large P, small principal leg, large interest share, until enough months have stacked those small principal legs.
Equal payments are not equal progress against P. Progress against P is the principal leg, and that leg starts small because P starts large.
Key terms
- Interest share
- Interest paid over a span, divided by cash paid over that span. Year 1 on this book: 83.7 percent.
- Principal retired
- The fraction of original P gone after k payments. Five years here: 6.8 percent. Fifteen years: 28.5 percent.
- Young balance
- A remaining principal still close to original P. Accrual dominates because the base of the charge is still large.
Worked example
Three spans, three retired fractions
Marrow Street Mortgage. $287,400 at 6.15 percent, 360 months. Figures from lessons 2 and 11.
- Year 1 paid
- $21,011.06
- After 5 years, principal gone
- $19,470.79
- After 15 years, principal gone
- $81,888.46
- Still unpaid at year 15
- $205,511.54
Interest $17,579.44, or 83.7%.
$19,470.79 ÷ $287,400 = 6.8%.
$81,888.46 ÷ $287,400 = 28.5%.
71.5% of original P, still accruing.
Half the months have not retired half the loan. The early interest share is what a large unpaid P costs, month after month.
Check yourself
On $287,400, year 1 pays $21,011.06 of which $17,579.44 is interest. After 5 years $19,470.79 of principal is gone; after 15 years $81,888.46 is gone. What are the three percentages, and why is the five-year figure so small?
Early interest share is the everyday version of accrual dominating a young balance, which Track 1 lesson 14 hides inside a monthly statement. Open Daily accrual, and why a monthly statement hides it →
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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.