Interest is money paid to a lender by a mortgage borrower, calculated as an annual percentage and compounded annually or monthly, for monies borrowed.
Interest can also be referred to as a lender’s return on investment. A lender will lend out money with an interest rate of return, for a profit for monies they lend.
An interest rate will vary between different types of mortgages, including fixed mortgages, variable mortgages, adjustable mortgages, closed mortgages, open mortgages, line of credits, private mortgage and second mortgages.
In many cases, a borrower(s) monthly payment will be comprised of principal and interest, meaning a portion of the monthly payment they make will be paid as interest (profit) to the bank or lender, and a portion will be applied to the principal amount they have borrowed, reducing the overall amount they owe to their lender.
In some cases, especially for home equity line of credits and private mortgage or second mortgages, the monthly payment amount may be interest only payments, meaning the borrower will only pay the interest portion for the loan and the monthly payments made will not be applied to the principal balance they owe.