-- I have done many things in my life, one is being a bookkeeper and Chief Financial Officer of a couple of Co-op housing units ( College Houses in Austin, Texas and Student Housing Corporation in East Lansing Michigan. One of the things I learned about was compounding interest.
-- Compounding interest is that part that eats up your mortgage payment or car payment so that only a little goes towards ownership. As you pay off more of the original price, the less of the payment goes towards interest and the more goes towards the original price (also known as “the principal”.
-- The way it works is that first the annual percentage of the interest is first charged and paid off, then the rest goes towards paying the principal. Lets say you have a 10% annual loan. This means that in 12 months (annual year) the one who loaned the money will charge you a rate of 10% of the principal over the year. Lets say you owe a $20,000.00 loan. 10% sounds like you would pay $2,000.00 over the year. However the interest is charged on the amount you owe each month, and as some of your payment goes towards paying down the interest each month, then the amount next month charged for interest is reduced, and the amount paying Principal goes up.

As you can see the monthly amount for interest is being reduced, thus the rest is going towards Principal. Notice that the amount for interest in the second year is higher that the first. Eventually at the later end of the note the vast majority is for Principal and the interest is much less. Also, paying more than $200.00 a month would reduce the monthly Principal owed and thus reduce the amount of interest charged each month. This would pay the Principal down quicker and over all save you money. If you don’t have that much on a monthly basis, then you pay more interest. It is the loaning persons “interest” if giving you the money.

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