You can apply the interest before or after the payment, it doesn't really make that much difference, especially when you pay monthly and it compounds daily. Th

You can apply the interest before or after the payment, it doesn't really make that much difference, especially when you pay monthly and it compounds daily. The more often it compounds the less of a difference it makes between interest computed before or after the payment. It's simpler and more accurate to say that the interest is added to the loan balance and then payments are subtracted. They don't subtract interest from payments, they add it to the balance. Extra payments don't have any interest applied to them, they go straight to principal. The comparison though is between paying your extra cash flow towards a mortgage or investing it. You don't take money from the investment to pay the mortgage. You pay the minimum to the mortgage and then invest the difference. As far as why banks want to do loans, you have to understand how banks work. What banks do is different. Banks take money from deposits and then loan that out. They pay 1% interest on saving account deposits and charge 4% on loans. They are effectively purchasing something at $1 to sell for $4. That's a huge markup (400%). Of course banks want to do loans. They also have fractional reserve working in their favor. They can loan out more money than they actually have in deposits because the money is created out of thin air. This is the same model used by savvy investors. They make investments using Other People's Money™.