Amortization
When you buy a house, you will experience a loan that is amortized. The first payment you make will be just a tiny bit of the principal (the actual amount of money you borrowed) and the rest will be an interest payment. For example, if your mortgage payment is $500, in the beginning the amount you are paying on the actual debt may be something like $20. The next month, you might be paying $25 on the debt and $475 on the interest. Over the course of time, the debt goes down slowly and the rate of principal to interest climbs. By the end of the loan, thirty years later, you may be paying $475 in principal and $25 in interest.
However, the thing to realize is during those first years of a loan, you are mostly paying interest. Also, if you add up the amount of interest you pay over the life of the loan, you will realize that you paid the selling price of your house maybe twice. That $100,000 house may actually cost you close to $200,000, depending on your interest rate.
Interest is what you pay for the privilege of borrowing money. But there are ways to avoid paying quite so much interest.
You can save thousands of dollars in interest payments and actually take years off your loan if you add even a little bit of money to the principal payment each month. Even $10 per month can make a significant different; with more money, you can pay off a 30 year mortgage in much less time and end up paying a lot less for your house.
Investigate this for yourself. There are many amortization calculators online that will tell you how much interest you will pay over the life of the loan and the difference even a small payment will make in how quickly the loan is paid off. Give up one dinner at a restaurant per month and pay off the house early!
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