Mortgage companies have foisted a huge scam on the American people. front loaded mortgages. How the fuck they got to get away with that is beyond me. The average American moves every 4 or 5 years. So if you buy a 200,000 dollar house and make payments for 5 years, what do you owe . If you took a 15 year mortgage out ,you would think that you would have paid 1/3rd off. Nope. You still owe about 200k. All your payments have gone into interest. So your real mortgage rate is 100 %. You pay mortgage costs ,points,searches and whatever they can get away with.Then you just make payments that do not drop your principle.
It is amazing that mortgage companies have all this money flowing in and they still go bankrupt. How badly are they run? The big 3 look good next to those incompetent thieves.
The only way out is pay off a house. Then you have a huge chunk to use if you need a bigger home. When homes were escalating in value ,you sold your house for more creating an illusion that you made money. But that just went into the bigger home that had also increased in cost. Mortgages are a fucking scam.
Well, if you want to have an identical payment (assuming fixed rate 15 or 30 year term) then the first payments will contain more interest than the later ones because you have a larger outstanding balance.
IOW, in the beginning you have $200k outstanding and you are paying interest on that. In year 20, you will have, say, $40k outstanding, so while making the same dollar payment, you have less interest due, so the principle goes down faster.
I don’t see the screwing here…
This fact is the reason why exotic, interest only mortgages are attractive to some. I still read that if you intend to move within 3 years you should go with something other than a 30-year fixed. It’s not a scam if you intend on living in the house you purchased for more than 10 years - then it’s the best deal you can get.
That’s why you should always read the contract.
Yes, it’s a scam alright. You pay interest on the outstanding balance by the month. Then you have to lay on a slice of payola to get them to bother fleecing you. That’s the power of money; they get to bend the rules to their advantage. The four things you can go to work on are fees, interest rate, payback period, and amount borrowed.
Assuming you are in the same boat as most folks, the limiting factor on your monthly payment is your income. In that case one real good way to reduce the amount of interest you pay is by borrowing less and then paying it off early. That means saving up a bigger down payment or buying less house. Then if you bear down and pay it off early, you get to keep a lot more of your cash.
The only reason the whole scam works at all is because of the tax break. Even if all your payments to just to interest, deducting the interest from your gross income is going to be a fair whack of change. Say you are in the 28% tax bracket, and you are early in the loan so 90% of your monthly payment goes straight to interest. If you’re paying maybe $1500 / month on that $200K home, you effectively get back about $380 / month from Uncle Sam. That’s free money compared to renting. If that ever goes away, owning a home will make a lot less sense.
Your OP doesn’t make any sense. Yes, the first few years of a mortgage reduce the principle by very little. That’s how math works. If someone offers to loan you $100k at 5%, you have to give them $5k that first year on top of whatever you put toward paying off the loan. There’s nothing to stop you from putting more toward the loan on top of the $5k, but your payment will be higher and it won’t be a 30 year mortgage any more because you’ll pay it off faster.
Since most banks do in fact offer shorter term mortgages and allow you to pay down standard 30 years faster than the fixed payment schedule, I’m not really getting the problem.
Seriously? This is not about equity derivatives, or sub-prime loans–you’re just pitting companies that charge interest to lend you money? What universe do you live in, where the money is free? (Cue Dire Straits.)
You know this is not some secret formula, right? This is just interest, you can calculate it yourself. Hell, Excel will do all the heavy lifting for you. Pick a principal amount and an interest rate, the rest is just algebra. And if you think the rate you’re reducing the principal (relative to the interest rate you agreed to) is not rapid enough, you know you can pay more, right? Tell me again how you think this should work?
I think you forgot the standard deduction you get whether you are paying interest or not. My understanding is that you only got the tax break on anything above the standard deduction ($5450 for single and $10900 for married). So you essentially get $0 back for the first $x paid in because everyone gets that anyway. So if you are married you are only getting back $123 per month and if single about $250.
That’s not free money, it’s just an effectively lower interest rate subsidized by the government. If you have e.g. a 7% interest rate and are in the 28% tax bracket, it’s no different than if you had a 0.72*7% = 5% interest rate and no tax deduction. The math that gonzomax is complaining about still holds true.
Sort of a tangent, but during the housing boom I kept seeing people use the argument that the interest rate deduction is why buying is so much better than renting because it’s free money, even when prices far outpaced equivalent rents. I think people are a lot better off if they just look at it like a rate reduction.
Can you really look at it as a simple rate deduction? You only get a deduction for all intents and purposes for anything that’s above the standard deduction. So using your 7% * 0.28 ~= 5% is giving it too much credit. I rent and I get to deduct $5,450 - and I pay no mortgage interest.
You’re right – in that case, it wouldn’t be as simple a calculation, although I suppose you could calculate the fraction of your interest that you do get to deduct and use that to calculate your new effective interest rate.
Luckily for me (ha!), I live in California, where the state taxes are high enough that I’ve pretty much always itemized, even back when I was renting.
Most Americans don’t have to move every 4 - 5 years. Most of them are moving because they see some house they like better in a nicer neighborhood. They figure out they can borrow more than they could a few years ago and since the American dream is apparently to max out their debt they move. You can get a mortgage for 10 years or 15 years and come out a little ahead. You can pay even 100 dollars ahead every month and get ahead but most people don’t because they can’t delay gratification to get ahead in the long run.
It’s not a scam, it’s how loans work. Are the mortgage companies supposed to loan you money for free? They gave you actual money to buy the whole house, you have to pay interest on the whole amount.
You sure do not understand the problem. The total amount paid is taken as interest. Do you think it ok to pay 5 years and have no principle reduced. You pay 1/3 of the agreed mortgage time and have nothing on principle. You pay for 5 years and still owe 200 grand. It is wrong. Of course a 200k mortage turns into a mill in a 30 years mortgage. how is that a 6 percent rate?
They are not forced to move. They just do. They will spend their entire life only paying interest. The saving factor was the increasing value of house. You would at least appear to be making out. Now houses are dropping so you pay interest forever.
gonzomax, you are completely misunderstanding how loans work. This is not some evil, secret plan. It is basic math. If you want to borrow $X for 30 years, at an interest rate of Y%, that will result in a certain monthly payment. Really and truly, it’s just math; this is not some scam somebody dreamed up. If you want to pay it off sooner than 30 years, pay more than the stated monthly payment.
BTW, after 5 years, the principal would have been reduced by some easy-to-calculate amount.
ETA: Also, I’ll ask again, how do you think this should work?
It’s not the mortgage company’s fault for offering an insane product- it’s the consumer’s fault for purchasing it. There is a sucker born every minute, who then wants to blame someone else for getting an interest-only product.
My 15 year mortgage was a godsend- sure, we were paying more interest than principle per payment in the first few years, but we have been principle-heavy for the last few.
Now, in the interest of full disclosure, in 1999 we had to do an 80/10/10 in order to buy our first house- 10% down, 80% first mortgage and 10% second piggy-backed onto the first. The rate on the second was ungodly- IIRC it was 9% or more. We knew that we were paying interest-only on the second, and that it was a dangerous product, so at the first opportunity we paid it off.
But it’s not insane! Who the hell is buying an interest-only mortgage? The 15-year mortgage gonzo described–in fact, any mortgage that doesn’t go on forever–has to be reducing the principal.
Someone wants to pay a fixed payment, spread out over 30 years, to borrow $200K, and they’re willing to accept an interest rate of 5%. AT THIS POINT, it is simply math. It is not a Ponzi scheme. There is not some evil banker, cackling over the havoc he’s about to create. It can ONLY work one way–if gonzomax wants something that works differently, then he does NOT want a 30-year, fixed rate mortgage for $200K at a 5% interest rate. Want to pay mostly principal in year one? It’s easy. Take out a one-year loan. He is seeing something “tricky” that simply isn’t. There’s no smoke and mirrors.
gonzomax, here’s a different way of thinking about it, maybe this will help. You seem to want the principal amount to be reduced proportionately with the percentage of payments / time passed. Think about that. Suppose you borrowed $150K. The mortgage company pays the guy who sold you your house $150K, and you now have a 15-year mortgage.
After 5 years, you seem to want the principal to have been reduced by about a third. If that were the case, you effectively had a ZERO INTEREST loan. You had the use of $50K for 5 years and you effectively paid the mortgage company–NOTHING. You just paid them back the first $50K they lent you, nothing else for their troubles. That can’t be a workable model, right? Follow that through logically–at the end of 15 years, you’d have paid back $150K. The mortgage company got zero return.
Here’s what you seem to be missing: if it’s a 5% loan, the mortgage company is earning 5%, every single year of the mortgage (ignoring points and such for the moment), regardless of how the principal was affected in a given year. You’re either OK with the rate or you’re not–the mortgage company doesn’t earn a higher return in year 3 versus year 27. They’re getting 5%. You get the use of the cash. That’s how it works.
I recently had an X year interest only (just re-fi’d to 30yr), I’ve also had 7 year balloon loans as well as multiple 30yr fixed. Each one I chose for the specific situation I was in (lots of factors).
Each of them can be a valuable tool as long as you are aware of what is going on, although I’m sure there are people that don’t really look at all of the numbers.
Of course you add up ALL your deductible expenses to see if you exceed the standard deduction, and that includes things like property taxes, state income taxes, charity donations, etc. My state income tax all by itself is high enough to exceed my standard deduction, so all of my mortgage interest is deductible.
Ed