How Interest Works on a Mortgage
Alright, let's talk about how interest works on a mortgage in a way that's easy to understand. Imagine that you want to buy a house, but you don't have enough money to pay for it all at once, so you go to a bank to borrow some money. The bank agrees to lend you the money, but they don't do it for free. They charge you extra money, called interest, for the privilege of borrowing their money.
Interest is like a fee that you have to pay on top of the amount you borrow. It's usually expressed as a percentage of the total amount you borrow. For example, if you borrow $100 at an interest rate of 5%, you would owe an extra $5 in interest for every year that you have the loan.
When you take out a mortgage to buy a house, you agree to pay back the money you borrowed (the principal) plus the interest over a certain period of time, which is usually 15, 20, or 30 years. Most mortgages require you to make regular monthly payments that include both the principal and the interest.
At the beginning of the mortgage, most of your monthly payment goes toward paying the interest, and only a small portion goes toward paying down the actual amount you borrowed. As time goes on, the proportion of your payment that goes toward the principal increases, and the portion that goes toward interest decreases.