The typical 21st-century mortgage is front-loaded: In the early years of the mortgage, most of the monthly payment goes to paying off interest, not principal. This concept began with building societies — organizations similar to a savings-and-loan — then spread into the commercial sector in the 1930s. It has advantages for home buyers, but critics of front-loading see it as a big win for banks, more so than for buyers.
Even if your mortgage payment stays the same over the life of the loan, what you're paying for doesn't. Mortgage expert Jack Guttentag says on his website, for example, that a $100,000, 6-percent, 30-year loan has a monthly payment of $599.56. At the start of the mortgage, $500 of the payment goes to interest, so you're paying off less than $100 of the principal each month. Only after many years of payments do you start paying more principal than interest.
Critics of front-loaded mortgages say they're a trap: By keeping you from paying off the principal quickly, the bank maintains a bigger loan, which justifies charging you more interest. Guttentag argues that it's simple math: You owe more money when you start paying than you will 20 years later, so it's natural to pay more interest. If lenders used front-loading to raise profits, he says, they'd charge higher rates on 15-year mortgages because buyers repay principal faster than a 30-year mortgage. Instead, 15-year mortgages are cheaper.
Front-loading rules the mortgage world, but it's not the only way to structure a mortgage. An interest-only mortgage, for instance, gives you several years of initial low payments because they don't pay off any of the principal. Up through the 1920s, payments were often interest-only for the term of the mortgage, followed by a lump-sum payment on the principal. Another option is to pay an equal share of the principal each month on top of the interest due, but this makes monthly payments bigger.
If you feel front-loading is a bad deal, try paying off more of the principal each month. It can be something as small as rounding up from $643 to $650 on each check, or something more ambitious, such as paying on a biweekly schedule. (26 biweekly payments adds up to 13 months of payments a year, yielding one extra payment). Whatever tactic you use, it's important to work it out with your bank so that the extra goes toward principal, not more interest. That way you cut your overall interest for the life of the loan.