If you are thinking about purchasing a house in the near future, you must make sure you get the best possible terms on your home loan. That means paying attention to the interest rate attached to your mortgage. Most people know that the higher the interest rate is, the more money you will pay over the life of the loan; however, how exactly does the interest attached to your mortgage work?
The Interest Is Annual Interest
First, understand that the interest rate attached to your mortgage is annual interest. For example, let’s say you take out a home loan for $300,000. If your interest rate is five percent, that means that you are going to pay approximately $15,000 in interest during the first year. That is an approximation because, with every monthly payment, the principal is going to drop slightly. This means that six months in, you won’t be paying interest on $300,000, but an amount that is slightly lower. Therefore, each month, the exact amount of interest that will be added to your loan will drop slightly.
You Pay More Interest In The Beginning And Less At The End
Next, understand that most of your first payments are going to go toward interest. That is a result of the amortization schedule. Your loan payments for the entirety of your loan have been calculated from the start. The loan is calculated so that you pay off the exact balance of your loan with the final payment. As a result, much of your first mortgage payment is going to go towards the interest, but at the end of the loan, most of your payment is going to go toward the principal.
You Could Save Money By Making Extra Payments
Because you are not going to be paying down much of the principal during the first few years, you might be interested in submitting extra payments to pay off the loan more quickly. A few extra payments can make a significant difference in the amount of interest you pay over the life of the loan, but you need to figure out what the best use of your money is right now. Consider reaching out to a professional who can help you navigate mortgage interest.