# Why is there so much interest on home loans?

Search around the internet for current mortgage rates and play with some of the amortization calculators. You'll see that at the end of the payment schedule you will be paying almost an equal amount in interest as you do in principle. I want to know why financing entities advertise their loans with less than 6% interest/apr/rate, but end up charging you nearly 100% of the borrowed amount in interest by the end of the schedule. What gives? I thought that at the end of a loan for \$100,000 at 6% interest meant you will only pay \$106,000 total, not the \$195,000 that the amortization calculators suggest.

• Is your question about the discrepancy between the listed number (annual interest rate) and the actual amount paid, or are you asking why so much interest is charged at all? – BrenBarn Jun 6 '16 at 3:36
• Short answer: Because the term of the loan is so long. – David Schwartz Jun 6 '16 at 4:39
• If you make no repayments during the year and then pay the full \$106,000 on the last day of the first year then you will only pay a total of \$106,000 (not including any fees), but most people don't pay loans off in this manner, the rate quoted is p.a (per annum). – Victor Jun 6 '16 at 12:43
• Did you not learn about compound interest in school? – user9822 Jun 6 '16 at 22:42
• My question was about how APR or Interest is applied. I understood before it was applied once to the entire loan term and paid off over the term. Here I'm finding out it's applied every year and must be fully paid every year. – CodeSeven Jun 11 '16 at 18:05

APR stands for "annual percentage rate." This means when you see a loan with a 6% rate, it is 6% per year. On a \$100,000 mortgage, where you aren't paying much of the principal down at first, a 6% rate would have you paying nearly \$6,000 in interest in the first year alone.

• So to verify, googling today's rates you have 3.659% APR. total interest and fees paid at the end of the term is essentially 109% (3.659 x 30) of the borrowed amount? And am I wrong to assume that an auto loan is only 6% overall? Is that also really 6 or whatever % of the principal amount being charged every year? – CodeSeven Jun 6 '16 at 4:48
• @CodeSeven You are charged interest on whatever is left of the principal of the loan. As the principal of the loan gets paid off during the term, you get charged less interest, and more of your payments go toward paying off the principal. Therefore, the total amount of interest you will pay during the loan depends on how long the term is. – Ben Miller - Remember Monica Jun 6 '16 at 5:03
• @CodeSeven yes, you are completely wrong to assume that Annual Percentage Yield actually means different things depending on the asset securing the loan – quid Jun 7 '16 at 4:51

Interest rates are always given annually, to make them comparable.

If you prefer to calculate the rate or the total interest for the complete time, like 10 years or 15 years or 30 years, it is simple math, and it tells you the total you will pay, but it is not helpful for picking the better or even the right offer for your situation.

Compare it to your car's gas mileage- what sense does it make to provide the information that a car will use 5000 gallons of gas over its lifetime? Is that better than a car that uses 6000 gallons (but may live 2 years longer?)

• Note that it is simple math, but it is NOT just multiplying the interest by the number of years of the loan. Remember, this is compound interest. Aganju doesn't imply otherwise, I'm just clarifying. – ChrisInEdmonton Jun 6 '16 at 11:11