Mortgage interest can be confusing. The amount of interest you pay each month, will depend upon the kind of loan you get. Whatever the loan type, your interest will always be tax deductible, which is an advantage to you as a future home owner. There are times when interest can work against you as it tends to be the highest cost of home ownership.
To help you wrap your head around mortgage interest and how it works, we have outlined three things you should know about it.
Interest Works the Opposite of Rent
With a traditional mortgage, the total sum you are borrowing is based on a specific interest rate paid over the term (aka lifespan) of your loan. The longer the term, the more interest you pay.
So, will a shorter loan term will cost less? Yes. However, a shorter term will also require a higher monthly payment. Before you assume a 15-year mortgage is right for you, you’ll need to consider whether the increased monthly payment will fit within your budget.
How is interest the opposite of rent? Your interest is like rent in that you pay your loan monthly. However, unlike rent, your monthly payment covers the cost of the previous month, not the coming month.
The Majority of Your Initial Payments Cover Interest
While a small portion of your initial payments will go to your principal, the majority of them will be applied to your interest. With a traditional 30-year mortgage, it takes roughly 10 years for this disparity to reverse. Once this happens, the majority of your monthly payments will go to your principle and you’ll begin building equity in your home at a more rapid rate.
Refinancing Costs More Than Just Your Principle
When you consider refinancing your home, it will always cost more than the outstanding principal you still owe. Why? Because you are taking out a new loan which is accompanied by a new interest rate.
Have additional questions about mortgage interest and how it works? Give me a call today.
