Blended payments

The outstanding principal can be repaid in two ways. Where a loan is payable "principal plus interest," a fixed amount of principal is repaid each month (or each week, every two weeks, or twice a month), together with interest on the outstanding balance. According to this "unblended" method, the largest and hardest payment to make is the very first one. After that, the interest charge is reduced each payment period, reflecting the reduced outstanding principal. For example, on a $100,000 mortgage at 8% calculated monthly and repayable $200 monthly principal plus interest, the mortgage payment the first month is $866.67. That's made up of $200 principal and $666.67 interest. In the second month the payment drops to $865.34 because interest in the second month is being calculated on an outstanding principal balance of only $99,800.

Far more common is the "blended" payment method. The same amount of money, consisting of both a principal and an interest component, is paid to the lender each month (or each week, every two weeks, or twice a month) during the term of the loan. But the break-down of the payment changes with each payment. Over time, more money goes towards principal while less is allocated towards the interest. While the interest portion is again greatest in the early years of the mortgage, the payment itself is constant for the mortgage term.

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