Interest
Definition and meaning of Interest in real estate.
Interest is the fee charged by a lender to a borrower for the use of borrowed money, typically expressed as an annual percentage of the outstanding loan balance.
In more detail
When you take out a home loan, interest represents the cost of borrowing that money over time. The interest amount is calculated based on the outstanding principal balance and the agreed-upon interest rate. Payments are structured so that a portion of each monthly payment goes toward the interest owed, while the rest goes toward reducing the principal balance.
In the early years of an amortizing mortgage, a larger share of the monthly payment goes toward interest rather than principal.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Also known as | Cost of borrowing |
| Determined by | Credit score and market conditions |
| Paid to | Lenders or financial institutions |
A home buyer takes out a mortgage to purchase a house, and their lender charges them an interest rate on the loan, resulting in a monthly interest charge that is added to their principal payment.
Frequently asked questions
How does interest differ from principal?
Principal is the actual amount of money you borrowed to buy the home, whereas interest is the fee the lender charges you for borrowing that money.
Can you reduce the amount of interest you pay over the life of a loan?
Yes, making extra payments toward your principal balance reduces the outstanding loan balance, which decreases the total interest calculated over time.
Related terms
Sources & references
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