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
Let’s use your example of a 300k loan with 7% interest over 30 years. You principle and interest portion of your payment for that loan is going to be $1,996 for 30 years (because maths)
In the first month you would have accrued 7% of 300k divided by 12 (7% annual, so 0.583%) or $1,750 in interest.
So you pay the bank $1,996 but your principle (the amount you still have to repay) only goes down by 246 dollars.
The second month you have smaller principle, but only slightly so you accrue $1,749 in interest. That month your $1,996 payment pays off 247 dollars.
All told in the first year you pay a total of $1,996 * 12 = $23,940 total to the bank but roughly $20,900 of that was to pay down accrued interest during that year and you only paid down ~3k of your principle.
As you pay off more, the monthly interest accrued gets lower so you pay off more and more of your principle as you go.
For a 30 year mortgage at 7% it takes nearly 22 years to pay off half of what you owed and then another 8 to pay off the second half
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