Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Mortgage Interest

What it is:

Mortgage interest is the compensation a borrower pays a lender for money used to purchase property.

How it works (Example):

Mortgage interest is the percentage charged on a mortgage that must be paid in addition to the principal. The mortgage interest rate is related to prevailing interest rate levels and may be fixed or adjustable.

Fixed rate mortgages have identical amortized payments for the life of the loan. [InvestingAnswers Feature: Amortization Schedule Calculator] By contrast, the payments on adjustable rate mortgages (ARMs) vary based on the fluctuations in an associated mortgage index.

Mortgage interest also applies to home equity loans.

Why it Matters:

Mortgage interest rates correlate directly with the perceived risk of the borrower. In other words, the more likely the borrower is to default on a mortgage, the higher the mortgage interest rate. Mortgage interest is unique because it is a deductible expense on personal income tax returns in the U.S.