176 – June 25
“The old woman triumphantly announced that she had borrowed enough money to pay all her debts.”—P.L. Lord
Anyone who has ever bought a home has been dismayed to find out how interest is amortized over the life of the conventional thirty-year mortgage. During the first fifteen years of the loan, the majority of the loan payment is interest. In fact, for the first five years, it’s almost all interest. It’s not until the twentieth year of the mortgage that the monthly payment is even half interest and half principle. Not to mention the fact that after paying for thirty years, depending on the interest rate, you will have paid more than twice the amount of the original price of the house.
I wonder what genius figured this out. It’s great for the mortgage lenders—in the first few years of a mortgage, they get all the interest charges paid upfront and you still owe them nearly the entire amount of principal. I suppose it didn’t make that much difference in the days when most people bought a house and stayed in it their whole lives. But today, people move much more often.
In our consumer-oriented society, people move up to the biggest and best house they can afford as soon as their income rises. With each new mortgage, almost all of their mortgage payment is interest; they have not made any significant principal payments at all. Essentially, they are just paying a fee for living in the house. People will argue, “Yes, but it’s tax deductible!” But you still have to pay out 100 percent of the fee in order to earn a 15-30 percent tax deduction.
(Continued on page 176 of The Wealthy Spirit)
“All my investments maximize my money!”
It’s always amazed me how people just accept certain conventions like this because this is just how it’s always been done and no one else does it a different way. Whole industries are locked into this cycle – the banks, the real estate agent, mortgage brokers, etc. But who made this amortization schedule up? You can see it is completely weighted on behalf of the banks. Whatever happened to simple interest?
I think the market is ripe for some enterprising financial institution to offer a different kind of amortization schedule. They’ll make less money per loan, but they will get everyone’s business!
Just something that makes you go “Hmmmm…”