Your mortgage amount and interest then gets spread out over a specified time frame, called the Amortization schedule.  In essence, the amortization schedule is how long it will take to pay your mortgage and interest off.  Loans typically have an amortization period of between 20 and 30 years, with few loans being shorter and few loans being longer.

In the beginning stages of your loan, your monthly payment consists of a large amount of interest and a small amount of principal being paid down.  As you get further into your mortgage, the amount paid in interest is less and the amount paid to principal is more.  Below is a typical amortization schedule for a $300,000 mortgage at 3.89%, paying monthly.

Amortization Schedule for a $300,000, 25 Year Mortgage at 3.89%

As you can see, in the first few years, you are paying more in interest than you are towards your principal in each monthly payment.  This trend starts to reverse around the  7th year of your mortgage.  At this time, your monthly payments begin to pay more down on your principal than you pay in interest.  

So now that we understand how a mortgage loan is constructed, how can we avoid paying so much interest and pay down the principal faster.  There are a few options.  The first thing to take into consideration is the amortization period.  The shorter the amortization period, the less interest you will pay and the faster you will pay off your principal.  When selecting your mortgage product, know what your financial goals are.  If your goal is to pay off your mortgage in the shortest amount of time, and you are willing to have higher monthly payments in exchange, choose a shorter amortization period.  

The second way to pay down your mortgage quicker is to make additional payments on your mortgage principal.  Most Lenders allow you to make additional payments on your mortgage, over and above your monthly payment.  Any additional payments made throughout a year go directly to principal, which pays down your principal quicker and allows you to pay less interest.

A third way to pay down your mortgage quicker applies only to Variable Rate Mortgages.  With a Variable Rate Mortgage, the interest you pay each month is dependent on the changing interest rate.  In times like we are experiencing now, your payment has undoubtably gone down because the interest rate has dropped so significantly.  If you are able to continue paying your original monthly mortgage payment, can continue to do so, and any additional money paid goes directly to your principal.  

To show you the difference between amortization schedules, take a 10 year, 15 year, 25 year, 30 year, and 40 year loan all at 3.89% paid monthly.  After the 10th year:

• 10 Year Mortgage has been paid down by 100%
• 15 Year Mortgage has been paid down by  60%
• 25 Year Mortgage has been paid down by 29%
• 30 Year Mortgage has been paid down by 22%
• 40 Year Mortgage has been paid down by 13%

As you can see, there are many ways you can maneuver your finances to help pay off your mortgage quicker.  Begin with the loan type that best suits your needs and financial situation, and continually assess your situation throughout the term of your mortgage.