How mortgages work

Training 735 minuteshow mortgages work

You are 36 and work as a welder. With your partner you earn $6,500 a month. You need to borrow $200,000 for a home. The bank sends three offers.

Training goal: Get a mortgage without overpaying

Situation

1. $200,000 for 30 years at 6%: the payment is $1,199. How much of the first payment cuts the debt?

2. Options: 30 years at 6% with a $1,199 payment, or 15 years at 5.5% with a $1,634 payment.

3. The bank offers a 5% variable rate instead of a 6% fixed rate. The payment starts $125 lower.

4. Four years later, rates have dropped. Refinancing would cut your payment by $200 a month and costs $4,000 to arrange.

Open a mortgage calculator and compare your payment for 15 and 30 years. Look at total interest.

How does a mortgage work?

A lender pays for the home, which serves as collateral. You make monthly payments that start mostly as interest and shift toward principal over time.

Is a 15 or 30-year mortgage better?

A 15-year loan usually costs 2-2.5 times less interest but has a higher payment. A 30-year loan is more flexible, especially with extra payments.

Should I pay off my mortgage early?

Every extra dollar cuts the balance right away. For example, $100 extra a month on $200,000 at 6% saves about $49,000 and 5 years of payments.

Numbers are illustrative. A game, not financial advice.