Definition: A front-loaded mortgage is a type of loan where the majority of initial payments go towards paying interest rather than principal. This structure makes the loan more costly upfront, as the principal balance reduces slowly in the early years, even though the payment amounts remain the same.

Key points:

• Interest-heavy payments initially: Front-loaded mortgages have a higher interest-to-principal ratio in the beginning, meaning early payments cover mostly interest.
• Impact on equity: Since principal reduction is minimal initially, building equity in the property can take longer compared to loans with more balanced amortization schedules.
• Common with fixed-rate mortgages: This structure is typical in fixed-rate mortgages with amortization schedules that allocate interest first.
• Refinancing and selling considerations: Since equity builds slowly, borrowers may have less ownership in the home if they wish to refinance or sell early in the mortgage term.

Tip: If you plan to stay in your home long-term, a front-loaded mortgage may not be an issue. However, borrowers planning to sell or refinance within a few years should be mindful of the slower equity build-up and explore options to mitigate these costs.

Last modified: November 5, 2024