Your mortgage is made up of the capital – the amount you’ve borrowed – and the interest charged on the loan. With most mortgages you pay off the capital and interest monthly over 25 or 30 years, which is why they’re called repayment mortgages.
Buying a home is the embodiment of the American dream. However, that wasn’t always the case: In fact, before the 1930s, only four in 10 American families owned their own home. That’s because very few people had enough cash to buy a home in one lump sum. And until the 1930s, there was no such thing as a bank loan specifically designed to purchase a home, something we now know as a mortgage.
Simply put, every month you pay back a portion of the principal (the amount you’ve borrowed) plus the interest accrued for the month. Your lender will use an amortizationformula to create a payment schedule that breaks down each payment into paying off principal and interest. The length or life of your loan also determines how much you’ll pay each month.
Stretching out payments over more years (up to 30) will generally result in lower monthly payments. The longer you take to pay off your mortgage, the higher the overall purchase cost for your home will be because you’ll be paying interest for a longer time period. In the beginning of the loan, the principal gets paid off slowly as most of the payment is applied toward paying interest. Toward the end of your loan, very little of the payment will be applied toward interest, and most of it will go toward paying the principal down. Online, you can use an amortization calculator to get an understanding of how interest is more expensive at the beginning of a loan.
In simple terms, a mortgage is a loan in which your house functions as the collateral. The bank or mortgage lender loans you a large chunk of money (typically 80 percent of the price of the home), which you must pay back — with interest — over a set period of time. If you fail to pay back the loan, the lender can take your home through a legal process known as foreclosure.