I've been paying my mortgage for years and I've never really understood how the interest they charge me each month works. Can someone explain the compound interest formula to me in simple terms? I have a loan at 3.5% over 20 years and I'd like to know how much extra I'll be paying in total.
The trick is that your bank calculates interest on the remaining balance each month, not on the original amount, so the interest decreases as you make payments. The formula they use is pretty complicated, but the key thing is that with a 3.5% rate over 20 years you'll end up paying almost 40-50% more than what you originally borrowed just in interest, though that percentage varies depending on how many payments you've already made.
what a lot of people don't realize is that the bank doesn't charge you the full 3.5% annual interest all at once, but breaks it down into monthly installments! each month it applies roughly 0.29% to whatever balance you still owe, and as you can see, that balance goes down with each payment, so technically the interest decreases month by month. over 20 years you'll probably end up paying between 70-80% more than what you originally borrowed (so if you borrowed 300,000 euros you'll end up paying almost 500,000 total), but that exact figure depends on your specific amortization schedule, so your best bet is to ask your bank for a complete amortization table where you can see broken down which part of each payment is interest and which part is principal!
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