Interest is a penalty for barrowing money/property. It works the same for home, car or credit card. You owe interest on the daily outstanding balance (total balance multiply by interest rate equal yearly balance due, divided by 360 months (30-years), is your daily interest payment – also known as “Per Diem Rate”).
When you do not pay-off the outstanding balance each month, new interest is added to the previous unpaid interest. That means you are building interest on top of interest, which is called compound interest. That is why the financed part of a loan is always bigger.
Think about a house being built brick by brick. If each brick represents interest, and you are paying more interest than the money you borrowed, when will you pay back the principal?
Let’s look at this scenario from a different view. You have a 30-year fixed mortgage at 5% interest. If you make principal-only payment equal to the structured principal/interest payments each month, you should be able to pay-off your home in 5 to 6 years and pay about $30,000 in interest on the entire loan, over the short life of the mortgage.
Wouldn’t this be a better scenario for your retirement? How about the ability to help your children/grandchildren get on their road to financial security, so they don’t have to make the same mistakes you made? Or how about you being very young?
