alright, i’ve been trying to save and buy a home for years now. might be able to do it this year but im having an incredibly hard time understanding the moving parts of a home loan. excluding everything but the principal and interest on a loan, how does a 7%APR on a loan of $300k end up making you pay like $750k over the course of 30 years ??? i also saw that home loans are front loaded for the interest first…. 7% of 300k is 21k but people talk about paying interest for the first 2-3 years of their mortgage… im not totally understanding how the interest is factored into the monthly payment.
In: Economics
You pay 7% of your outstanding loan balance every year.
So if you have a loan of 100,000, in the first year you pay 7,000 in interest.
If your repayments are 1,000 a month, the of the 12,000 you pay in a year, 7,000 goes to interest and 5,000 goes to reducing the value of your loan.
For year 2, your remaining loan balance is 95,000. 7% of this is 6,650 – that’s your interest payment. The remainder – 5,350 is paid against your loan balance.
Do this 30 times for a 30 year loan and you’ll end up paying more in interest than you borrowed over the lifetime of the loan.
When getting a mortgage, get the lowest interest rate you can. Ignore “cash back” offers – these are there to distract.
Let me know if you want an excel file which will work all this out for you, and let you play with different amounts of deposit, interest rate etc. and show you your monthly payments etc.
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