Assume the following mortgage. (see table below)
The interest amount in any given month is OPENING_BALANCE * ANNUAL_RATE / 12 (months per year).
So in the first month, the charge to borrow the money for 1 month is $1,250. We pay the bank $2,000. They take the $1,250 off the top, and apply the remainder to our principal.
Now look at month two. Our principal has been reduced by $750, Our interest is reduced by $4, and our payment stays the same. This means that an extra $4 off of principal compared to the previous month.
Now look at month 12. For that month, I've applied an extra payment of $10,000 on top of my regular payment of $2,000. Notice that the interest due that month is $1,204, The bank will skim their charge off the top of my payment, leaving $10,796 to be applied to principal.
As Sharptooth said HERE, the monthly interest is the amount we pay to keep them from demanding repayment of the entire loan right now. Everything else we pay goes to reduce our principle balance.
As for making an extra payment of $2000, the easiest way to do this is to switch your payments to bi-weekly. Instead of paying $2,000 a month ($24,000), you'll pay $1,000 every two weeks. Since there are 52 weeks in a year, you'll end up making 26 payments, for a total of $26,000. This works really well if you are paid bi-weekly, since the months with the extra payments end up being the months with the extra paycheques. On a 25 year mortgage, this plan will have you debt free nearly 6 years earlier. If you are paid monthly, then you're best alternative is to simply increase your monthly payment to 13/12 of what it currently is.
Principle Rate Period Payment
$250,000 6% 25 $2,000
Date Open Interest Payment Extra Close
01-Jan-14 $250,000 $1,250 ($2,000) $- $249,250
01-Feb-14 $249,250 $1,246 ($2,000) $- $248,496
01-Mar-14 $248,496 $1,242 ($2,000) $- $247,739
01-Apr-14 $247,739 $1,239 ($2,000) $- $246,977
01-May-14 $246,977 $1,235 ($2,000) $- $246,212
01-Jun-14 $246,212 $1,231 ($2,000) $- $245,443
01-Jul-14 $245,443 $1,227 ($2,000) $- $244,671
01-Aug-14 $244,671 $1,223 ($2,000) $- $243,894
01-Sep-14 $243,894 $1,219 ($2,000) $- $243,113
01-Oct-14 $243,113 $1,216 ($2,000) $- $242,329
01-Nov-14 $242,329 $1,212 ($2,000) $- $241,541
01-Dec-14 $241,541 $1,208 ($2,000) $- $240,748
01-Jan-15 $240,748 $1,204 ($2,000) $(10,000.00) $229,952
01-Feb-15 $229,952 $1,150 ($2,000) $- $229,102
01-Mar-15 $229,102 $1,146 ($2,000) $- $228,247
01-Apr-15 $228,247 $1,141 ($2,000) $- $227,389