How does interest work on a mortgage?

Question

If you borrow $100k at 6% interest, why is it that you end up paying much more than $106k?

Answer 1

Because the interest is 6% per year. You pay interest on outstanding loan amount. Say you borrowed 100K at 6% for 30 years.
The first payment you make will be $599.55, they will calculate interest for the month as 100,000 x 6% /12 = $500
So, out of your payment 500 will go toward interest and 99.55 will go towards principal.
Next month you make the same payment, the interest is now calculated as 99,900.45 x 6%/12 = 499.50
So, this month 499.50 will go towards interest and 100.05 towards principal, and so on and so forth.
Anyway, if you paid you loan in 1 year, you would actually end up paying no more than 106,000, but since in most cases it takes longer you end up paying more interest.
But the key is YOU ONLY PAY INTEREST ON WHAT YOU OWE. So, as soon as you send any extra money, you start saving on interest.

Answer 2

This is because the bank is not a charity and if they give you $100k then they have to make an income off it. So the "extra" is the interest income due the bank for it's generosity in giving you a loan.....

Answer 3

Through the miracle of compound interest!

If you borrow $100,000 at 6% interest (that is 6% per year), that interest is calculated on a DAILY basis of the outstanding balance of your loan. That means that at the end of 30 days, instead of owing only $100,000 you owe $100,000 plus 0.06 x 100,000 / 365 x 30. Confusing? You betcha--until you get used to it.

On the other hand, the miracle of compoud interest cn work for you when you invest your money wisely. Check out books on investing at your local library. They have lots of 'em, I'll bet.