Why Is the Principal Amount of Mortgage Different From What I Received?
by Joey Campbell
Mortgage principal balance and quoted pay-off are never the same amounts.
Each day that you have a mortgage on your home will cost one day of interest, so the actual balance owed increases with each day that passes. This will continue until you pay the next payment, when the interest for the previous month and the allotted amount of principal are posted. The interest clock continues to tick for the days in the new month. This process of applying principal and interest until a loan is paid out is called amortization.
Effects of Payment
Each month when a payment of principal and interest is applied against your loan, the principal amount is reduced. The amortization schedule provided by your closing agent will show you the effect of the first payment and all following payments as
they are applied. New daily interest -- aka per diem -- is then recalculated using the new principal balance. Each day that goes by, one day's interest is added to the balance until the next payment is applied.
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