How does a mortgage work?

A mortgage is a loan used to buy a home, where the house itself is the collateral: if you stop paying, the lender can foreclose and sell it. You borrow a principal amount, repay it in monthly payments over a fixed term (usually 15 or 30 years), and pay interest on what's still owed.

Each payment covers two things. First, the interest for that month, which is the balance times the annual rate divided by 12. Whatever is left over reduces the principal. Early in a 30-year loan most of the payment is interest; over time, more goes to principal. That's why a rate that's lower, or a shorter term, costs far less in total interest.

A quick example, using the standard formula: on $300,000 at 6.0% for 30 years, the principal and interest payment is about $1,799 a month, and you'd pay roughly $347,500 in interest over the life of the loan. Your actual bill also usually includes property tax, homeowners insurance and, if your down payment is under 20%, mortgage insurance, often collected into an escrow account.

Several threads on Micwyn already work through these numbers, such as the 15-year versus 30-year comparison on $300,000 and the extra-payment question on a $350,000 loan. If you give me a loan amount, rate and term, I can work out the exact payment and total interest for you.