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What is Mortgage Interest?
Mortgage interest is money you pay in interest to the lender that holds your mortgage. Every month, a mortgagee pays an equal sum that always includes principal and interest. The principal is the amount that is applied towards the original loan amount. The interest is amount the lender is charging you to borrow the money.
In the first five to ten years of a mortgage, the mortgage interest accounts for well over half of the scheduled monthly payment. As the mortgage ammortizes, the amount applied to the principal grows and the amount being applied to the interest decreases. This is because, when the principal balance is lowered, the amount of interest also lowers.
A document called a truth in lending disclosure is provided to every mortgagee. This document outlines the mortgage interest rate, ammortization schedule, total interest, and total of all payments at the end of the mortgage term. The figures can be staggering when viewed for the first time.
There are different types of mortgage interest rates. A fixed rate applies to most mortgages, and simply means that whatever the interest rate is at closing, it is the rate that will apply for the life of the loan. A variable interest rate means the rate that is charged can fluctuate. Some variable rates remain fixed for a period of time and later become variable, while others start out as a variable rate and become fixed after a period of time. Standard mortgage interest rates change almost daily and vary slightly from lender to lender.
Unfortunately, there is no such thing an interest-free mortgage. However, primary mortgage interest is tax deductible up to 100% in many cases, and in some cases, the interest from a second mortgage or equity loan is also tax deductible. By law, your mortgage company must provide you with a year-end statement every tax year declaring the amount of interest you paid. If you are paying interest on investment property, rental property, or another property that is not your primary residence, you should talk to a tax advisor to determine whether it is tax deductible.
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![Mortgage interest is the amount the mortgage lender is charging for borrowing money.]()
By: Vesna CvorovicMortgage interest is the amount the mortgage lender is charging for borrowing money. -
![Deductions on home mortgage interest are available to U.S. taxpayers even if they own more than one property.]()
By: bmakDeductions on home mortgage interest are available to U.S. taxpayers even if they own more than one property. -
![Unfortunately, there is no such thing as an interest-free mortgage.]()
By: BlueSkyImagesUnfortunately, there is no such thing as an interest-free mortgage.
Discussion Comments
We have applied for a home equity line of credit that has a different interest rate than our home mortgage interest rate. The rate on the home equity loan is whatever the current interest rates are at the time, not what they were when we purchased our home.
This is one way to borrow some money and use the equity you have in your home as collateral. The interest rates are usually good and you know you are borrowing against something that you own. There are many reasons people take out a home equity loan, but we are planning on doing some remodeling.
We have always gone with a fixed interest rate when we purchased our homes. One time we had a fixed rate for a set number of years and then had the option to refinance. I won't do that again, and feel much more comfortable knowing what the interest is going to be for the entire loan.
Even if you go with a fixed rate, and interest rates drop by at least a percentage point, it might be a good idea to look at refinancing for a lower rate. Even though the amount of money you pay in mortgage loan interest is tax deductible, it still adds up to be a lot of money that I would rather spend on something else.
When I make extra payments on my mortgage, I always apply them to the principal amount. If you look at an amortization table and see how much interest you are actually paying over the lifetime of the loan, I am always motivated to pay some extra each month, if possible.
One tip a mortgage officer gave me once is when you make your monthly payment, try to include the next months principal amount in that payment. When you first begin doing this, it is a small amount, but will get bigger the longer you keep paying. It can reduce the number of years you pay on the loan and help save you some money.
It makes no difference. After all, the interest adds up to the principal and becomes the new principal itself.
If you make an extra payment to your lender, which is better for you to make it to, interest part or principal part?
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