Will I annually have to pay the full interest on a loan?
If I get a refi with cash out on my home for $50,000 and my APR is 5%, do I pay have to pay the full interest on the loan every year for the life of the loan? Meaning, will I have to pay $2,500 a year on interest?
The answer is no. All loans are amortized. The payments in the early months are almost all interest, and in the final months are almost all principal. That is so the banks make money if you pay off your loan early; you have already paid most of the interest so they come out way ahead. Look at your full statement which by federal law must list the amount of principal and interest each month of the loan. Notice how the interest keeps dropping each month, and the principal payment keeps rising.
That way, if people buy a house with a 30-year mortgage and they leave after 5 or 10 years, they have hardly paid off any of the principal.
The banks always win.
No you will not pay $2,500 a year of interest. As you pay off the loan the principal (in this case $50,000) decreases. The amount of interest you pay is determined by the principal remaining on the loan. Therefore in the early years of paying off a loan more interest is being paid and in the later years less is being paid.
Example: If in the first payment you paid $5,000 towards the loan, then $2,500 would pay down the principal and $2,500 ($50,000 x 5%) would be interest. This would result in a decrease in principal owed to $47,500. If the next payment was $5,000 then $2,625 would go towards principal and $2,375 of the payment would be interest ($47,500 x 5%).
Actually, you will pay more interest at the beginning of the new mortgage and less at the end. Looks like a right angle triangle, the slope of the line in a right angle triangle looks like a mortgage.
So most your payment will go to interest in the first year, and most of the payment to principal in the last year of the mortgage. Ask your lender for an amortization schedule.