Mortgage interest is the amount paid to the lender for borrowing money. It accounts for over half of the monthly payment in the first few years and decreases as the principal balance is reduced. The Truth in Loan Disclosure outlines the interest rate, lock-up schedule, and total payments. Fixed and variable rates are available, and mortgage interest is tax deductible in many cases.
Mortgage interest is money you pay in interest to the lender who owns your mortgage. Each month, the mortgagee pays an equal amount that always includes principal and interest. The principal is the amount that is applied to the original amount of the loan. Interest is the amount the lender charges you for borrowing the money.
In the first five to ten years of a mortgage, mortgage interest accounts for more than half of the scheduled monthly payment. As the mortgage pays off, the amount applied to principal increases and the amount applied to interest decreases. This is because when the principal balance is reduced, the amount of interest also decreases.
A document called the Truth in Loan Disclosure is provided to each mortgagee. This document outlines the mortgage interest rate, the lock-up schedule, the total interest, and the total of all payments at the end of the mortgage term. The figures can be staggering when first seen.
There are different types of mortgage interest rates. A fixed rate applies to most mortgages, and simply means that whatever the closing interest rate is, that rate will apply for the life of the loan. A variable interest rate means that the rate charged can fluctuate. Some variable rates stay fixed for a period of time and then 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 one lender to another.
Unfortunately, there is no interest-free mortgage. However, the primary interest on the mortgage is tax deductible up to 100% in many cases, and in some cases, the interest on a second mortgage or home equity loan is also tax deductible. By law, your mortgage company must provide you with a year-end statement each fiscal year stating the amount of interest you paid. If you are paying interest on investment property, rental property, or other property that is not your primary residence, you should speak with a tax advisor to determine if it is tax deductible.
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