Paying back a mortgage

You pay back your loan by making a payment every month. The bank doesn't send you a bill, so it's your responsibility to remember to make the payments every month. They do give you a cute little coupon book, with one slip for each month, so you can include the slip when sending in your check each month. These days most banks also let you pay online. I strongly urge you to set up an automatic monthly draw from your bank account, so you never miss a payment, and so it's one less thing you have to worry about each month.

Part of your payment goes towards the principal (the amount the bank loaned you), and part of it is interest (the bank's profit from lending you money). So when the bank loans you $100,000 you pay them back that $100,000 and then some. If you only had to pay back the same $100,000 they gave you then there wouldn't be anything in it for them. That's why they charge interest.

Even though part of your monthly payment is for principal and part is for interest, you write only a single check to the bank each month, and that payment amount stays the same for the life of the loan. You don't have to know how much of your payment is for principal and how much is for interest, but it's usually printed on the coupon, as well as in an end-of-the-year statement the bank will send you for your taxes, since you'll get to deduct the interest you paid if you itemize.

Maybe you remember percentages from high school, so you figure that if you have a $100,000 loan at 9% you'll be paying the bank back $109,000? Nice try, but that's simple interest, and banks don't work that way. If you like you can see the appendix about compound interest, but all you really need to know for now is:

1. You'll be paying the bank a lot more than just simple interest.
2. When comparing loan offers from two different banks, just a percentage point or two of difference means a big difference in how much interest is paid.
3. For the first several years most of your payment goes to interest, not principal. On a 30-year, 7% mortgage, in year #15 over 75% of your monthly payment goes to interest and not equity. After 15 years you won't own half your house, you'll own only 27% of it.