Why Do We Pay Interest on Real Estate Loans?

We pay interest on real estate loans for the same reason we pay interest on other loans: because borrowing someone else's money is a convenience. And we pay interest on borrowed money because someone took a risk in lending it to us and allowing us to pay it back over time. To avoid this, you must build your savings.

Where the Money Comes From for Real Estate Loans

Banks, credit unions, mortgage bankers and private investors lend money to buy real estate. Each of them are in the business of lending money to borrowers who show they have an acceptable credit score, a steady income and who sign a legal document stating they agree to borrow and repay the loan. This is a business for them that produces an income, which keeps their business going. Each time the borrower pays the money back, a portion of that money is interest.

Interest on Real Estate Loans Is a Business

The borrowing and lending of money is big business. Banks, credit card companies and private investors in the primary money market earn a living through the calculated lending of money; that money may be their own or someone else's. Paying interest on any commercial loan is standard because you are borrowing. Someone has borrowed money to you, you likely had to show the ability to repay, which reduces the lender's risk, and that lender makes money from lending the money.

How to Avoid Paying Interest on Real Estate Loans

There is only way to avoid paying interest on real estate loans. If you have all the money required to purchase real estate, you do not need to borrow money. This requires building your savings up over time, doing your research, bargain shopping and living within your means to acquire real estate.