Interest only accumulates for the time you've borrowed the money. Each payment you make reduces the principal by a small amount and pays the lender the interest that has accrued over the previous month.
If you're thinking about buying I would advise you to find your self a good Realtor. (See link below on how to do this) and they can suggest some local lenders you could speak with who would be happy to pre-approve you and answer any questions you might have.
I see your question in your second entry here. You are almost right. Larry Tollen's numbers are good, but as you see from some of the other ones, in Washington State the cost of selling a house is roughly about 9% of the sales price. So your check will not be $122k. More like $77,000.
You cannot really say that the 3 years interest you have paid is a loss. It is a cost of the benefit of living in this house. The alternative to not buying, and thus not paying this interest, is to rent, so you would be out money anyway. You have to compare living cost and the benefits of owning vs renting.
So if you instead would have rented a house worth $500,000 for three years you would just be out the money for rent, have no upside potential in increased value, and the check for $77,000 would belong to your landlord whose mortgage you have been paying off through your rent.
To complicate matters a little you also should look at the after tax situation when comparing rent vs ownership. Because you can deduct the interest you pay from your income before it is taxed the actual payment is not that much. The tax code really favors home ownership.
I hope this can help you in your calculations!
If you have a $400k loan on a $500k home, when you sell the home in three years, a very small part of the principal balance will be paid off, meaning your loan balance might be $370k. If the home were worth $520k at that time, your equity would be $150k minuse about 9% cost of sale in the state of Washington.
The proceeds of the home will pay the balance owed to the lender. The rest of the proceeds are your equity and you would use that to buy another property, which is wisest, or keep the equity for your own purposes.
I'm wondering if you're thinking of all the interest over the term of the loan that is paid. That interest only accrues as long as you have the loan. Remember, the value of the home and the principal balance on the loan are two distinct, separate numbers. Contact me if you have more questions. I can be reached at http://www.karenmcknight.com .
Escrow or Title Company will collect proceeds and pay off the bank and creditors ! Then give you the balance of the proceeds. You will be paying mortgage interest and principal monthly.
The mortgage interest is not accrued and paid at the time of selling. Those loans were called
Negative amortization loans and are not generally available.
Enjoy your home.
From Larry Tollen's answer, looks like I will get a check of 122K, but by then I would have paid 100K in downpayment + around 100K in interest = 200K. That means, I overall stand to lose around 80K + cost of selling and taxes, right?
Obviously, if the house appreciates and sells for more than 500K, I will lose less money over 5 years. I am getting this right?
Back before the peak there were a number of loan types that did negatively amortize (increase in balance), like the pick-a-payment type loan. I'm not sure any of those exist now.