What is a mortgage?
The price of time, laid over the price of a home.
You borrow to buy a home and repay over many years. Inside each monthly payment, interest dominates at first; the nearer the end, the more goes to the principal.
In 30 seconds
- A mortgage is money borrowed to buy a home, repaid over many years.
- At first, most of each monthly payment goes to interest. Over time, more goes to the principal.
- Borrow $300,000 at 6% for 30 years and total interest comes to about $347,500 (a worked example).
At first, interest comes first.
Early on, most of each monthly payment goes to interest.
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What a payment contains
The US Consumer Financial Protection Bureau (CFPB) explains that at the beginning of a mortgage you owe more interest because the balance is still high, so most of the monthly payment goes to interest and the rest to principal.[1]
As the principal falls, so does the interest, and more of each payment goes to principal. Near the end, most of the payment pays off the last of the principal. This process is known as amortisation.[1]
Over 30 years, more interest than you borrowed.
Long terms make total interest large.
Total interest on $300,000 borrowed at 6% for 30 years (a worked example)
The monthly payment is $1,798.65.
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A worked example
Borrow $300,000 at 6% for 30 years and the monthly payment is $1,798.65. In the first month, $1,500 of it is interest and only $298.65 goes to principal (our calculation).
Total interest over 30 years comes to about $347,500 — more than the amount borrowed (our calculation).
One point of difference, widened by the years.
A small difference in the rate changes the total a great deal.
Total interest on the same $300,000 at 7% for 30 years (a worked example)
The monthly payment is $1,995.91 — about $71,000 more interest than at 6%.
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A gap in rates
Borrow the same $300,000 at 7% and the monthly payment is $1,995.91, with total interest over 30 years of about $418,500 — about $71,000 more than at 6% (our calculation).
Fixed or variable.
Some mortgages have a rate that does not change; others have one that can.
A scale to read before you borrow.
A scale for reading a mortgage.
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The rate
The annual rate, and whether it is fixed or variable.[2]
The term
How many years to repay. The longer, the larger the total interest.
What a payment contains
How much of each monthly payment is interest and how much principal.[1]
This is not advice
This edition explains how mortgages work. It does not recommend or compare any loan or lender.
Next question
NEXT QUESTIONInterest brings more interest with it.NEXT QUESTIONWhat quietly drains from your gains.See the Field Notes shelf →What this edition cannot tell you
- Mortgage rates and rules by country.
- Costs beyond repayments (fees, insurance, taxes and so on).