The cost of borrowing money. The lender charges you a percentage of your remaining loan balance, and you pay it as part of your monthly mortgage payment.
Interest is what the lender charges you for the privilege of borrowing their money. It's expressed as an annual percentage (like 6.5%), but it's actually calculated and added to your loan every month.
Here's how it works: each month, the lender takes 1/12 of your annual interest rate and multiplies it by your current remaining principal. That's your interest charge for that month. As you pay down principal, the interest charge drops — which is why your payment stays the same but more of it goes toward principal as the years go by.
Interest is the biggest reason a 30-year mortgage costs nearly double the home's purchase price by the time you're done paying.
Example
On a $320,000 balance at a 6.5% rate, the first month's interest is $320,000 × (0.065/12) = $1,733. That's why your early payments feel like you're barely paying down the loan.
Formula
Monthly interest = (Current principal × Annual rate) ÷ 12
Also known as
mortgage interest, finance charge