Mortgage interest
Mortgage interest is the price of borrowed money. It is calculated on the outstanding principal balance, which means it falls as the balance falls — and rises with nothing except the rate itself.
How it is charged#
On a standard amortising mortgage, interest accrues on the balance and is collected monthly as part of the payment. The servicer takes the interest owed first and applies what is left to principal.
That ordering is why the early years of a loan feel unproductive. The interest due on a large balance consumes most of the payment, leaving little to reduce the balance, which keeps the interest high the following month.
Rate versus APR#
Two numbers appear on every loan offer and they measure different things.
The interest rate is what accrues on the balance. It determines the monthly payment.
The annual percentage rate folds specified fees and closing costs into an annualised figure so that competing offers can be compared. A loan advertised at a lower rate but carrying points and origination fees can be more expensive than one at a higher rate with none.
Comparing rates alone is how people end up paying for a headline number.
Why extra payments early matter so much#
An additional amount applied to principal removes that amount from every future interest calculation for the remaining life of the loan.
Paid in year two of a thirty-year mortgage, that is twenty-eight years of avoided interest. Paid in year twenty-five, it is five. The dollar is the same; the effect is not remotely.
This is also why the direction of an extra payment matters. Sent without instruction, servicers often apply it to the next instalment rather than to principal, which changes when you next owe money but not how much interest you pay.
Per diem, and why payoff dates matter#
Interest does not stop on the day a decision is made. It accrues daily until the money actually arrives.
That is why a payoff quote states a date and a per diem figure — the amount each additional day adds. A quote good through the end of the month is short if the wire lands on the first, and the shortfall, however small, can mean the payoff is not accepted as satisfying the loan.
The same arithmetic governs redemption after a foreclosure sale, where the amount required grows every day of the redemption period at the rate stated on the sheriff's certificate. In both cases the number to ask for is not just the balance but the balance as of a specific date, plus what each day beyond it costs.