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## Money Saving Tip

## See What Goes Towards Your Principal

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When you buy your first home, you may get a shock when you take a look at your first mortgage statement: You'll hardly be making a dent in your principle as the majority of your payment will be in interest. Even though you may be paying over $1,000 a month toward your mortgage, only $100-$200 may be going toward paying down your principal balance.

The reason that the majority of your early payments consist of interest is that for each payment, you are paying out interest on the principle balance that you still owe. Therefore, at the beginning of your loan, you may owe a couple hundred thousand dollars and will still have a hefty interest charge. With each payment, you will reduce the principle balance and, therefore, the amount of interest you have to pay. However, since your loan is structured for equal payments, that means that you're just shifting the ratio, not actually paying less each month. With each successive payment, you are putting in a little more toward principle and a little less toward interest. By the end of your loan term, the majority of each payment will be going toward principle.

The amount that you pay in principle each month depends on a number of variables, including:

- Amount of the loan
- Interest rate
- Length of the loan
- How many months you have already paid in to the loan

The precise formula for determining the payment for your loan is P=L[c(1+c)^n]/[(1+c)^n-1]. P is the payment, and L is the loan value. The period interest rate is c, and n is the total number of payments in the life of the loan.

You can use this formula to determine your payment at any time. Then subtract it from your actual mortgage payment to determine the principle that you are paying each month.

Of course, this formula is quite complicated, and it isn't necessary to use it at all. There are two other ways to understand your principle payment each month.

The first is to look at your bill. If you are receiving a monthly statement for your mortgage, it should include a breakdown of your payment, including how much goes to principle, how much goes to interest and how much goes to variables such as property taxes, private mortgage insurance and homeowner's insurance.

The second is to use a calculator like the one offered here. It allows you to enter the amount of the loan, the current interest rate, the length of the loan and the number of months you have already paid in the loan. It will then provide you quick and accurate results so you can get a clear picture of your principle payments each month. The results are e-mailed directly to you within moments, and you don't have to enter any personal information to get your results. Use it regularly to find out exactly where you stand with your mortgage.