Mortgage

A mortgage is the largest loan most households ever take and the slowest to repay. The buyer puts down part of the price, the lender advances the rest, and the loan is amortized: every monthly payment is the same, the interest portion is computed on the balance still owed, and what is left of the payment reduces that balance. Because the balance starts large, the early payments are mostly interest; on the 30-year loan in the example below, the principal portion does not overtake the interest portion until the twentieth year. The house is the collateral; if the payments stop, the lender can foreclose and sell it to recover the balance.

In a sentence

• "The mortgage is $1,618 a month for principal and interest, plus $425 into escrow for taxes and insurance."
• "Five years into the mortgage they had paid off only $16,356 of the $256,000 they borrowed."
• "A mortgage pays for the house up front; a HELOC borrows against the part of it you already own."

How it works

1. The loan amount is the price minus the down payment. On a $320,000 home with 20% down, the loan is $256,000.
2. The rate and the term set the payment. A fixed rate holds for the whole term; an adjustable rate holds for a set number of years and then moves with a published index.
3. Each payment splits into interest and principal. The interest is the balance times the monthly rate; the rest of the payment is principal, and the balance falls by that amount.
4. Taxes and insurance are usually collected on top, in an escrow account the lender pays the bills from, and private mortgage insurance is added while the down payment is under 20% on a conventional loan.
5. The lender records a lien on the home and releases it when the balance reaches zero.

Monthly payment = loan × r ÷ (1 − (1 + r)^−n), where r is the yearly rate ÷ 12 and n is the number of months

Government-backed loans, insured or guaranteed by a federal program, have their own down payment and mortgage insurance rules; every other mortgage is a conventional loan.

An example

A $320,000 home bought with $64,000 down and a $256,000 loan at 6.5% for 30 years, the example's assumed rate.

The payment is $1,618.09 every month for 30 years. The first one is $1,386.67 of interest and $231.43 of principal, and the interest over the term comes to $326,514, more than the amount borrowed. Adding $200 a month from the start ends the loan in 267 months, just over 22 years, and cuts the interest to $228,119; the same loan over 15 years costs $2,230 a month and $145,406 in interest.

Why it matters

The mortgage decides how much house a household can carry, and the term decides what the house costs in total. The monthly payment is the number to size the purchase on, with taxes and insurance included, because it is fixed for decades while income is not. The mistake the schedule prevents is treating the payment as progress: in the example, five years of $1,618 payments, $97,085 in all, reduce the balance by $16,356. The balance is a liability in net worth and the home is an asset, so equity grows by that principal and by whatever the home's value does, and only the principal is in the household's control.

Mortgage versus a HELOC

A mortgage is an installment loan that pays for the home and is repaid on a schedule; a HELOC is a revolving line of credit secured by the home equity a homeowner already has, drawn as needed and repaid as it is used. The mortgage comes first and is the larger, longer and usually cheaper debt, with a fixed rate on most of them; a HELOC sits behind it as a second lien, usually at a variable rate, and its balance can be zero.

Common questions

Is a mortgage the same as a home loan? In everyday use, yes. Strictly, the loan is the promise to repay and the mortgage is the document that pledges the home as security for it, which is why a lender is said to hold a mortgage on a house. The two are signed together and the word covers both.

What is a good mortgage rate? The lowest among the offers available to you on the day you apply. Rates move with the market, and within a market they depend on your credit, the down payment, the term and the points paid at closing, so compare offers of the same term against each other by APR rather than against a number from a different month.

How much of a mortgage payment goes to principal? Early on, little. In the example, the first payment puts $231 of $1,618 toward the balance, the first year puts $2,861, and the share rises every month as the balance falls; the principal portion passes the interest portion in the twentieth year.

What happens if I pay extra on a mortgage? An extra amount goes entirely to principal, because the month's interest was already covered, so it shortens the term and cuts the interest. In the example, $200 a month extra ends the loan almost eight years early and saves about $98,400 in interest.

Go deeper

• The Mortgage calculator estimates the full monthly payment on a home, principal and interest plus property tax, insurance, HOA dues and PMI, and the total interest over the life of the loan.
• Does a house count toward net worth? puts the home on the asset side and the mortgage on the liability side, and explains which of the two to watch.
• How to track a mortgage or car loan that doesn't connect keeps the balance current from the statement or the amortization schedule with one number a month.

Where it shows up in Zypper

Zypper keeps the mortgage and the house as two accounts and charts the result. A mortgage connects like other loans, alongside auto, student and personal loans, and contributes its remaining balance to the liability side of net worth, updating as payments post; one that cannot be connected is a manual account whose balance you set to the remaining principal and update when the statement arrives. The house is a manual account too, at your estimate of what it would sell for, so it counts toward net worth without a live feed and changes only when you change it. Net worth is computed from every account, assets minus liabilities, and charted over time. See Supported account types, Manual accounts, and Net worth tracking for the details, or get started with Zypper to put the house and the loan on the same sheet.