The episode behind this
This calculator is the interactive half of an episode. The video explains why the number lands where it does.
Watch it on YouTubeA $400,000 house does not cost $400,000. Put your own numbers in and see what it actually costs by the end, and how much of that is interest rather than house.
Remaining balance over time. The curve is flat at the start because early payments are almost entirely interest.
A mortgage is quoted as a house price and a rate, which makes it sound like you are buying a house for that amount. You are not. You are buying the house and renting the money, for decades, and the rent on the money is often comparable to the price of the house.
On a $400,000 loan at 6% over 30 years you pay back about $863,000. The house is $400,000 of that. The other $463,000 is the cost of not having the money up front.
Each payment is split between interest and principal, and the interest is charged on what you still owe. At the start you owe almost everything, so almost the whole payment goes to interest. On a typical 30-year loan the first payment is around 83% interest. That is why the balance barely moves for years, and why it is not a sign you are doing anything wrong.
It also explains why paying extra early is disproportionately powerful. An extra dollar in year one removes a dollar of debt that would otherwise have accrued interest for twenty-nine more years. The same dollar in year twenty-five removes almost nothing.
Rates are quoted in small-sounding increments, which hides how they compound. Moving from 6% to 7% on that same loan adds roughly $95,000 over the term. It is not "one percent more", it is closer to a fifth more house.
Try it above: change the rate by a single point and watch the total, not the monthly payment. The monthly figure is designed to look survivable. The total is the honest number.
Standard amortisation. The payment is fixed, interest each month is the outstanding balance times the monthly rate, and the rest reduces the balance. Fees, insurance and rate changes are not modelled.
Rates change, most loans are not fixed for their whole life, and this ignores fees, insurance, rates and maintenance. It also assumes you make every payment on schedule. Treat the output as the shape of the thing, not a quote.
This calculator is the interactive half of an episode. The video explains why the number lands where it does.
Watch it on YouTube