Rental Property Mortgage Interest Expense

With a traditional mortgage, a portion of each payment that you make goes towards mortgage interest, while the remainder of the payment goes towards principal reduction . When you really stop and think about it, the interest portion can be viewed as the lender's "profit", or reward for providing you with the mortgage loan. And from your perspective, it's simply a necessary cost of owning rental property and doing business as a landlord.

Because mortgage lenders are naturally in business to make a profit, they'll try to make their profit on the mortgage loan as quickly as possible. They do this by "front-loading" the interest portion of the loan payments. This is accomplished by charging the bulk of the total loan interest in the beginning years while gradually reducing the interest payments down to nearly zero towards the end of the loan term.

So in the beginning, the interest payment portion dwarfs the principal, but towards the end of the loan term the opposite takes place with the principal payments being much larger than the interest. This is how traditional mortgages are "amortized", or paid down.

The Interest Dilemma

While mortgage interest payments definitely eat away at your cash flow, there is somewhat of a silver lining to this dilemma. Interest payments on a mortgage can be used to reduce your real estate taxable income . So, come April 15th, you'll owe less in income taxes to Uncle Sam thanks to your interest expense payments.

The following example shows how to determine the total interest amount on the first payment of a typical fixed rate traditional mortgage…

Initial Mortgage Principal = $250,000

Mortgage Term = 30 years

Annual Interest Rate = 6.5% = 0.065

Effective Monthly Interest Rate ( I ) = 6.5% / 12 months = 0.542% = 0.0054

Total Monthly Mortgage Payment (Principal and Interest) = $1,580.17

Interest Amount of 1st Mortgage Payment = ( I ) x ( Mortgage Balance ) = 0.0054 x $250,000 = $1,350.00

So, for the very first mortgage payment of $1,580.17, the interest portion is $1,350.00. The difference of the payment ($1,580.17 - $1,350.00) equals the principal portion, or $230.17. Therefore, about 85% of this loan's first mortgage payment is interest, and the remaining 15% is principal.

For more in-depth information about mortgage interest, please visit The Landlord's Library book collection. It's a terrific, one-stop source for practical, comprehensive information on the entire subject of residential landlording.

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