Mortgage payments tables list the amount that goes towards the principal and towards the interest. But since the bank is going to get whatever it is going to get, why should I care about this breakdown? Aren't PV and FV the only parameters I should care about?
3 Answers
If you are in the US (or some other places) then the interest on your mortgage is (sometimes) tax deductible. Principal repayments are not. Therefore you need to know how much of your payment is interest and how much is principal, in order to be able to report the interest amount on your tax return..
By knowing the tax deduction you will be receiving in future years, you'll be able to calculate you after-tax net-income, which will change every year, because of the changing breakdown into interest and principal.
answered Mar 26, 2015 at 19:41
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But do I have a choice of the percentage profile throughout the years? i.e. if I know my salary will rise in the next years, I would prefer paying the interest later. If not, then why should I care?– SparklerMar 27, 2015 at 1:24
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2@Sparkler Nope, you don't have a choice of how much interest you pay aside from the length of the mortgage and paying off principal early. But even if you can't really control how much interest you pay, you still want to know exactly how much it is.– Craig WMar 27, 2015 at 2:13
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@CraigW, so if I understand you correctly, it's just for a "peace of mind", because since I cannot control anything of this, except aiming to get a higher salary, but that's something I'd aim to do regardless...– SparklerMar 27, 2015 at 7:12
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1@Sparkler It's more than just peace of mind, I'd say this answer gives you a very practical reason for knowing how much interest you pay. You may not be able to change how much interest you pay, but you can potentially reduce your taxes.– Craig WMar 27, 2015 at 15:28
The one value that I see coming from these amortization tables are that they show what will happen if you pay ahead and essentially jump down the table. It allows you to easily calculate interest savings from paying ahead. It's also a nice visualization of how much the early payments are going mostly to interest. Other than that, I agree, there isn't tons of value.
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I wonder if the bank knows this and publishes these lists to psychologically trick people into paying early. Any idiot can look at these lists and determine that they can 'screw' over the bank by paying early. "I'll show them, I say". But in reality, if you payoff early, you're giving up the cheapest loan you'll ever have and the bank can easily re-invest your cash for more than they were getting on your loan. Money has a PV/FV for banks just as it does for us humans. Just a thought. Mar 26, 2015 at 1:53
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3A mortgage is not necessarily the cheapest loan, if you factor in all the ancillary costs. For instance, I have to carry flood insurance that covers the balance of the mortgage, not the replacement value of the house. (It's a rural property, acreage with an older house in an upscale area, so I could probably sell it for more without the house than with.) For the OP, it's kind of a nice feeling when you finally reach the point where you're paying more in principal than interest.– jamesqfMar 26, 2015 at 4:09
You may want to consider the principal payments as savings. So if you were calculating your savings rate including 401(k), you could put the principal payments as savings, or increasing your net worth if you don't consider home equity as savings.
bank is going to get whatever it is going to get, why should I care about this breakdownAs some people, including myself, get curious why even after paying the payments the principal isn't going down. So they check the breakage to make sense. And the calculations aren't that easy to follow, for people not conversant with how they are calculated. So it helps them.