Glossary Terms

Interest Cost

The dollar amount of interest paid over the life of a loan.

The dollar amount of interest paid over the life of a loan.

Most mortgages are fully-amortizing. This means the payments are designed to cover the interest due plus reduce the balance a little each month. As the balance gets smaller, there is less interest expense, and as interest expense drops, more of the payment can be applied to paying down the balance. Eventually, the loan is paid in full. The total of all the interest paid is the interest cost. In the example below, the total interest cost over the life if this one-year $1,000 loan is $27.29.

Chart showing interest cost

How to Reduce Interest Cost

Interest cost can be reduced by paying off the loan faster or choosing a loan with a lower interest rate.