Why is there so much interest on home loans?
"APR stands for ""annual percentage rate."" This means when you see a loan with a 6% rate, it is 6% per year.  On a $100,000 mortgage, where you aren't paying much of the principal down at first, a 6% rate would have you paying nearly $6,000 in interest in the first year alone." Interest rates are always given annually, to make them comparable. If you prefer to calculate the rate or the total interest for the complete time, like 10 years or 15 years or 30 years, it is simple math, and it tells you the total you will pay, but it is not helpful for picking the better or even the right offer for your situation. Compare it to your car's gas mileage- what sense does it make to provide the information that a car will use 5000 gallons of gas over its lifetime? Is that better than a car that uses 6000 gallons (but may live 2 years longer?)
There are a few reasons, particularly for businesses. The first is opportunity cost. That chunk of money they have could be used to get higher returns somewhere else. If they can borrow from a bank at low interest rates to finance their ongoing operations, they can use their cash to get a higher return somewhere else. The second is credit rating. For public companies, ratings companies give high emphasis to companies with large reserves. This strengthens their ability to pay back the loan should it become necessary. A good credit rating in turn let's the company borrow money at lower rates. When a company can borrow money at low rates, it circles back to the first point where they can now put their reserves to better use. The third is leverage. Companies can use the cash they have built up to leverage into a larger investment. Assuming the investment works out, it will pay for the cost of borrowing over time. For instance let's say I have $1 million to invest. I can pay all cash for a $1 million apartment building or I can leverage that into a $3 million building. Assuming I run it well, the tenants will pay for the cost of borrowing $2 million and at the end of the term I'll be left with my $3 million building. The problem comes when the borrower cannot afford his home.  If a borrower buys more home than they can afford, as long as he can sell the house for more than he owes, he's not in a disastrous situation. He can sell the house, pay off the mortgage, and choose more affordable housing instead.  If he is upside-down on his home, he doesn't have that option. He's stuck in his home. If he sells it, he will have to come up with extra money to pay off the mortgage (which he doesn't have, because he is in a home he can't afford). It used to be commonplace for banks to issue mortgages for 100% of the value of the home. As long as the home keeps appreciating, everybody is happy. But if the house drops in value and the homeowner finds himself unable to make house payments, both the homeowner and the bank are at risk. Recent regulations in the U.S. have made no-down-payment mortgages less common. "Banks make money on load origination fees. The ""points"" you pay or closing costs are the primary benefit to the banks. A vast majority of the time risks associated with the mortgage are sold to another party. FYI, the same is true with investment banks. In general, the transaction costs (which are ignored by modern finance theory) are the main thing running the incentives for the industry." If you mess with the interest deduction, you take away one of the main reason for home ownership.  So without the deduction we will become a nation of renters.  This will only hurt communities because renters have less at stake when it comes to community prosperity. According to my wife who used to work in the industry, since an investment mortgage is more likely to fail (they are just riskier) there are higher loan to value requirements and higher interest rates. They are just different products for different situations. I can think of a few reasons why they seem like a bigger deal to people than similar situations with other loans. As you point out, though, being underwater on your home loan is a less serious condition than having large student loans and a poor paying job, for example.  If the student loan situation ever comes to a head, we may have people talking about student loans in hushed tones. Surely because higher education participation has increased there are a larger number of students with debt which means less demand for absurdly priced homes which means prices will drop to affordable levels.  But we can't talk about markets working normally when it comes to home prices which always remain high! Right? And then there is the issue of people who actually don't intend to reduce the size of their loan. They only want to pay the interest, so their debt with the bank remains constant. If you are upside down, it means you will not have the financial means to remove the debt. If, for some reason, you are no longer able to pay the bank, you might lose the house. After that you will have no house, but you still have a debt with the bank. It also reduces risk from the bank's eyes. Believe it or not, they do lose out when people don't pay on their mortgages. Take the big 3 (Wells, Chase and BoA). If they have 50 million mortgages between the 3 of them and 20% of people at one point won't be able to pay their mortgage due to loss of income or other factors, this presents a risk factor. Although interest payments are still good, reducing their principal and interest keeps them tied down for additional (or sometimes shorter) time, but now they are more likely to keep getting those payments. That's why credit cards back in 07 and 08 reduced limits for customers. The risk factor is huge now for these financial institutions. Do your research, sometimes a refi isn't the best option. Sometimes it is. A lot of loans are taken out on a fixed rate basis, so the rate is part of the contract and is therefore covered by contract law. If the loan is taken out on a variable basis then in principle the rate can rise within the terms of the contract.  If a particular lender tries to raise its rates out of line with the market then its customers will seek alternative, cheaper, loans and pay off their expensive loan if they can. If rates rise sharply in general due to unusual politico-economic circumstances then those with variable rate loans can find themselves in severe trouble.  For example the base rate in the UK (and therefore variable mortgage rates closely tied to it) spiked sharply in the late 80s which caused severe stress to a lot of borrowers and undoubtedly pushed some into financial difficulties. "Interest rates are at a record low and the government is printing money. You can get a fixed rate loan at a rate equal to inflation in a healthy economy. Unless you know that you are moving in < 5 years, why would you expose yourself to interest rate risk when rates are about as close to zero as they can be? If your thought with respect to mitigating interest rate risk is: ""What's the big deal, I'll just refinance!"", think again, because in a market where rates are climbing, you may not be able to affordably refinance at the LTV that you'll have in 5-7 years.  From 1974-1991, 30 year mortgages never fell below 9%, and were over 12% from 1979 to 1985. Think about what those kinds of rates -- which reduce a new homeowner's buying power by over 40%, would do to your homes value." That really depends on the lender, and in the current climate this is extremely unlikely. In the past it was possible to get a loan which is higher than the value of the house (deposit considered), usually on the basis that the buyer is going to improve the property (extend, renovate, etc.) and this increase the value of the property. Responsible lenders required some evidence of the plans to do this, but less responsible ones simply seem to have given the money. Here in the UK this was often based on the assumption that property value tends to rise relatively quickly anyway so a seemingly-reasonable addition to the loan on top of the current value of the property will quickly be covered. That meant that indeed some people have been able to get a loan which is higher than the cost of the purchase, even without concrete plans to actively increase the value of the property. Today the situation is quite different, lenders are a lot more careful and I can't see this happening. All that aside - had it been possible, is it a good idea? I find it difficult to come up with a blanket rule, it really depends on many factors -  On the one hand  mortgage interest rates tend to be significantly lower than shorter term interest rates and from that point of view, it makes sense, right?! However - they are usually very long term, often with limited ability to overpay, which means the interest will be paid over a longer period of time. There is a significant tie between housing prices and mortgage rates.  As such, don't assume low mortgage rates mean you will be financially better off if you buy now, since housing prices are inversely correlated with mortgage rates.  This isn't a huge correlation - it's R-squared is a bit under 20%, at a 1.5-2 year lag - but there is a significant connection there.  Particularly in that 10%+ era (see chart at end of post for details) in 1979-1982, there was a dramatic drop in housing price growth that corresponded with high interest rates. There is a second major factor here, though, one that is likely much more important: why the interest rates are at 10%.  Interest rates are largely set to follow the Federal Funds rate (the rate at which the Federal Reserve loans to banks).  That rate is set higher for essentially one purpose: to combat inflation.  Higher interest rates means less borrowing, slower economic growth, and most importantly, a slower increase in the money supply - all of which come together to prevent inflation. Those 10% (and higher!) rates you heard about?  Those were in the 70's and early 80's.  Anyone remember the Jimmy Carter years?  Inflation in the period from 1979 to 1981 averaged over 10%.  Inflation in the 70s from 1973 to 1982 averaged nearly 9% annually.  That meant your dollar this year was worth only $0.90 next year - which means inevitably a higher cost of borrowing.   In addition to simply keeping pace with inflation, the Fed also uses the rate as a carrot/stick to control US inflation.  They weren't as good at that in the 70s - they misread economic indicators in the late 1970s significantly, lowering rates dramatically in 1975-1977 (from ~12% to ~5%).  This led to the dramatic double-digit inflation of the 1979-1981 period, requiring them to raise rates to astronomic levels - nearly 20% at one point.  Yeah, I hope nobody bought a house on a fixed-rate mortgage from 1979-1981. The Fed has gotten a lot more careful over the years - Alan Greenspan largely was responsible for the shift in policy which seems to have been quite effective from the mid 1980s to the present (though he's long gone from his spot on the Fed board).  Despite significant economic changes in both directions, inflation has been kept largely under control since then, and since 1991 have been keeping pretty steady around 6% or less.  The current rate (around 0%) is unlikely to stay around forever - that would lead to massive inflation, eventually - but it's reasonable to say that prolonged periods over 10% are unlikely in the medium term.   Further, if inflation did spike (and with it, your interest rates), salaries tend to spike also.  Not quite as fast as inflation - in fact, that's a major reason a small positive inflation around 2-3% is important, to allow for wages to grow more slowly for poorer performers - but still, at 10% inflation the average wage will climb at a fairly similar pace.  Thus, you'd be able to buy more house - or, perhaps a better idea, save more money for a house that you can then buy a few years down the road when rates drop. Ultimately, the advice here is to not worry too much about interest rates. Buy a house when you're ready, and buy the house you're ready for.  Interest rates may rise, but if so it's likely due to an increase in inflation and thus wage growth; and it would take a major shift in the economy for rates to rise to the 10-11% level.  If that did happen, housing prices (or at least growth in prices) would likely drop significantly. Some further references: "Usually not the total interest, but all interest accrued and unpaid to date. This is called the ""Loan Payoff Amount"", and repays the bank their principal plus the ""true"" cost of capital on that principal since your last amortized payment (which is probably never, since you just signed the loan papers). There may also be a ""prepayment penalty"". This is something that should have been disclosed to you if it exists, but it's fairly rare in U.S. mortgages anymore.  The theory is, the bank got the money they paid you at the start of the loan by selling a bond package backed by your mortgage and others of similar credit history and/or about the same time (a ""mortgage-backed security""). By turning around and paying early, you meet your obligation, but the bank is now stuck with at least 10 years of quarterly coupon payments on that bond, which they were expecting to pay using your mortgage interest. For their trouble, you would pay an additional amount that either covers their ""call price"" on the portion of the bonds used for your principal, or simply buys them the time to re-issue a new mortgage using your repaid principal to back the bond again. In the modern housing market, such a prepayment penalty is very rare, because so many lenders are willing to give you a mortgage without one, and so many buyers balk at the thought of having to pay more if they pay early; the whole point is to pay less by paying early. Just something to look up in your mortgage documentation." In most cases there is no debt attached to those properties, so there is no risk to financial institutions.   So that leaves us with an increase in supply of houses most people can't afford at current prices, expect a short-term boost to construction while many are converted to duplex/apartment type properties and slight downward pressure on prices. Obviously these are wild generalisations and the effect will be massively different in most cities compared to rural or small-town areas.