piece of cake;
a home owner offers his house at 'x' price.
You agree to this price after seeing an appraisal that equals or is even a bit higher.
each payment, [if not interest only
loans-- only good for some situations,
not discussed here],
includes principle,
interest and often times,
mortgage insurance.
ignoring the mi for a minute,
initially, to make it viable for a lender,
the first few months and years generate
a lot of interest and not much payment
goes toward the actual purchase price
itself. AS the principle is paid down,
the remaining amount is equity, or
actual ownership, if you wish.
say you buy a house for $150,000.
out of each payment in the first year
or two, of say 15,000 per year,
each payment may be 1,100.
[no amoritization schedule used, just
rounded numbers]
of the $1,100, per month, about $1,080
goes to interest. That remaining amount
$20, is principle, which reduces the debt
on the house. AS the debt is reduced,
the difference between purchase price
and debt is called equity, what you
now own.
The game plan is, pay the entire balance
off as fast as you can COMFORTABLY.
in the first 10 yrs, the home has been
paid for excluding interest, so, with
interest, it takes 30 yrs to pay it off.
if one makes extra, every month,
payments, one can gain equity, thus
speeding up the time one gains
equity. IN some cases, just paying
extra can cut the 30 yrs of normal payments to only 7 years.
That means that someone is making
the standard payment to the home
and makes a small, extra payment that
goes [if so directed] to principle.
ONE pays interest on the remaining
balance; so, as the equity builds, the
more that payments go to reduce the amount of the obligation.
