Annuity

An annuity is a series of payments made at equal intervals.

It can include regular deposits into a savings account, monthly mortgage payments for a home, monthly insurance, and pension payments.

Annuity payments or deposits may be made monthly, quarterly, yearly, or at any other regular interval.

Consider Ryan, who takes out a mortgage to buy a house.

Ryan takes out a two hundred thousand dollar mortgage with a four percent fixed interest rate for thirty years and agrees to pay back the loan amount plus interest in monthly installments.

These monthly payments are considered an annuity.

At first, Ryan's payments primarily cover interest, but gradually, more payments go toward repaying the loan principal and less toward interest.

This is because interest is calculated based on the remaining balance of the loan.

The annuity concept helps borrowers like Ryan understand how their monthly payments are set up and how the timing of these payments impacts the total amount they repay over the loan's duration.