eli5 mortgage payments.

Question

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

Answer 1

> ??? 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…

A point about this: it’s necessary if you want the same payment every month.

If you wanted to pay “1/360th of the principal every month, plus interest” your first payment would be something like $21,800 (depending on your setup). Your last payment 30 years later would be $800. By “front-loading” and spreading out the interest, you’ll have a consistent payment every month for 30 years (which generally will benefit you, due to inflation, and means you’ll actually be able to make payments.)

The math works out if you think about it (lower principal = less interest, so paying exactly $800 a month every month for thirty years is going to slowly tip one way over the other).

There’s nothing stopping you from paying above and beyond your regular payment so you are paying off the principal faster–in fact, plenty of people recommend you do exactly that, if you can.

Also, remember that the “extra interest” you pay is just compound interest. Paying $750,000 for a $300,000 house sounds terrible…but after inflation, that $300,000 is going to be (assuming 3% inflation every year) $728,178 after thirty years. That money is gonna be worth about the same no matter what, only now you’ve lived in a house for 30 years in addition to owning it at the end.