Of your first payment, the interest portion will be $755.21,
while only $97.51 will apply to the principal (the amount you
borrowed). Interest is the amount you owe ($125,000) multiplied
by your annual interest rate (%7.25) then divided by 12 (the
number of payments per year). As the principal declines slightly
each month, so will the interest paid.
After five years, the interest portion of your monthly payment
decreases to $713.60, while the principal would increase to $139.12.
The remaining principal balance is reduced to $117,973. Assuming
the home appreciated 3% per year in value, it would be worth
$185,483 at the end of five years, and equity would have increased
to $67,510.
While the math may be a bit confusing, the reality is not.
With each payment, valuable equity in your home increases. |