Interest
The cost of borrowing money, expressed as a percentage of the loan amount and typically calculated annually (APR). In real estate, interest is paid to the lender in addition to principal payments as part of monthly mortgage payments.
Example
“The mortgage has a 5.5% annual interest rate, meaning the borrower will pay $1,375 in interest charges each month on a $300,000 loan.”
Memory Tip
Interest is what makes lenders 'interested' in lending money - it's their profit for taking the risk, and it definitely makes a difference to your wallet.
Why It Matters
Interest rates significantly impact monthly payments and the total cost of homeownership over the life of the loan. Even small differences in interest rates can result in thousands of dollars in savings or additional costs.
Common Misconception
Many borrowers think interest is only calculated on the original loan amount, but it's actually calculated on the remaining principal balance, which is why more interest is paid in early years when the balance is higher.
In Practice
A borrower with a $300,000 mortgage at 6% interest will pay approximately $1,500 in interest during their first monthly payment, with only a small portion going toward principal reduction.
Etymology
From Latin 'interesse' meaning 'it matters' or 'it makes a difference,' reflecting how the cost of borrowing money definitely matters to borrowers.
Common Misspellings
Compare the best financial products for you
More in financing
Other financing terms you should know
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.