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What is Mortgage Interest?

Mortgage interest is the compensation a borrower pays a lender for money used to purchase property.

How Does Mortgage Interest Work?

Mortgage interest is the percentage charged on a mortgage that must be paid in addition to the principal. The mortgage interest rate is related to prevailing interest rate levels and may be fixed or adjustable.

Fixed rate mortgages have identical amortized payments for the life of the loan. [InvestingAnswers Feature: Amortization Schedule Calculator] By contrast, the payments on adjustable rate mortgages (ARMs) vary based on the fluctuations in an associated mortgage index.

Mortgage interest also applies to home equity loans.

Why Does Mortgage Interest Matter?

Mortgage interest rates correlate directly with the perceived risk of the borrower. In other words, the more likely the borrower is to default on a mortgage, the higher the mortgage interest rate. Mortgage interest is unique because it is a deductible expense on personal income tax returns in the U.S.

[If you're ready to buy a home, use our Mortgage Calculator to see what your monthly principal and interest payment will be.]

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.