If I borrow 100k at 5% interest, and to be paid back in 5 years, why is it not that case that I just pay 21k per year and would have paid 105k after 5 years? I heard that if I pay back a little extra every year, it will help to go pay off the interest first, what does that mean? If I owe a set amount of money on fixed interest, how can the total amount change?
In: 4
Lots and answers. Here’s the shortest and simplest:
– Every time you pay bay a loan (a mortgage is just a loan), before you do, it has already grown by the agreed rate of growth (the interest rate).
– So $100,000 grows to say $101,000 after 1 month, but you pay back $1,200 per month. So only $200 goes to reducing the initial $100,000
Why is it like this? Because it’s the only way that make sense if you consider the following cases:
– what if you miss a payment? Well, the debt you owed still grows, but you didn’t pay some off
– what if you pay more than the agreed amount, like $2,000 say? Well, then you paid off more of the principal.
Hope that helps.
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