# I pit mortgage companies **URL:** \ **Category:** The BBQ Pit\ **Created:** [January 3, 2009, 1:51pm UTC](https://boards.straightdope.com/t/i-pit-mortgage-companies/479698 "2009-01-03T13:51:32Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![gonzomax](https://avatars.discourse-cdn.com/v4/letter/g/e8c25b/32.png) [@gonzomax](https://boards.straightdope.com/u/gonzomax)\ **Post date:** [January 3, 2009, 6:31pm UTC](https://boards.straightdope.com/t/i-pit-mortgage-companies/479698/21 "2009-01-03T18:31:06Z")
> [@Stratocaster](#): > > 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. So I borrow 200 k. I pay 1500 a month for 5 years. After 5 years I owe 200 k. That does not make sense. ---
**Author:** ![RaftPeople](https://avatars.discourse-cdn.com/v4/letter/r/6f9a4e/32.png) [@RaftPeople](https://boards.straightdope.com/u/RaftPeople)\ **Post date:** [January 3, 2009, 6:35pm UTC](https://boards.straightdope.com/t/i-pit-mortgage-companies/479698/22 "2009-01-03T18:35:26Z")
> [@dgrdfd](#): > > 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. But homeowners also get the additional value of the home due to appreciation (avg of 3% per year over the last 50yrs in the US). ---
**Author:** ![RaftPeople](https://avatars.discourse-cdn.com/v4/letter/r/6f9a4e/32.png) [@RaftPeople](https://boards.straightdope.com/u/RaftPeople)\ **Post date:** [January 3, 2009, 6:40pm UTC](https://boards.straightdope.com/t/i-pit-mortgage-companies/479698/23 "2009-01-03T18:40:27Z")
> [@gonzomax](#): > > So I borrow 200 k. I pay 1500 a month for 5 years. After 5 years I owe 200 k. That does not make sense. It does if you chose a product (loan) like that (which I did). But I knew that I could make payments against the principal any time I wanted by paying extra. In my case it gave me the lowest rate available at that time that had a fixed jump to a pre-determined higher rate in X years, so it made sense for me. ---
**Author:** ![Dangerosa](https://avatars.discourse-cdn.com/v4/letter/d/22d042/32.png) [@Dangerosa](https://boards.straightdope.com/u/Dangerosa)\ **Post date:** [January 3, 2009, 6:49pm UTC](https://boards.straightdope.com/t/i-pit-mortgage-companies/479698/24 "2009-01-03T18:49:56Z")
> [@gonzomax](#): > > So I borrow 200 k. I pay 1500 a month for 5 years. After 5 years I owe 200 k. That does not make sense. On a standard load, using those numbers (and taking out PMI and property taxes, you have a 30 year loan at about 8.25% In five years you owe $190k. There were interest only loans - you don’t pay down the principal at all. Some people had them for special use - some people bought them to be able to afford more house assuming that the house would appreciate. That’s a gamble they took as a borrower…no different than me borrowing $10k and then buying stock in Microsoft assuming it will go up. ---
**Author:** ![Chief\_Pedant](https://avatars.discourse-cdn.com/v4/letter/c/a6a055/32.png) [@Chief\_Pedant](https://boards.straightdope.com/u/Chief_Pedant)\ **Post date:** [January 3, 2009, 6:52pm UTC](https://boards.straightdope.com/t/i-pit-mortgage-companies/479698/25 "2009-01-03T18:52:03Z")
> [@gonzomax](#): > > So I borrow 200 k. I pay 1500 a month for 5 years. After 5 years I owe 200 k. That does not make sense. You problem is not mortgage companies. It’s not learning (or understanding) math. Any loan, at any interest, is paid back by paying both the interest and the principal (the amount of the loan). If I lend you a million dollars and you agree to pay me 5% interest, you would owe me $50,000/yr just for the interest (I am simplifying this so you get it). If you paid me $4000/month for the next thousand years, you’d still owe me the million (actually a lot more) because you never even paid me the interest you owe, much less paid down the loan! There should be a law forbidding mortgage companies from lending to people who cannot understand basic arithmetic and pass a basic test on it. If they are unable to understand such a simple concept they cannot possible be considered competent to apply for the loan. Of course, such a screening test would promptly generate howls of protest for preventing the underserved from getting loans… ---
**Author:** ![Huerta88](https://avatars.discourse-cdn.com/v4/letter/h/82dd89/32.png) [@Huerta88](https://boards.straightdope.com/u/Huerta88)\ **Post date:** [January 3, 2009, 6:52pm UTC](https://boards.straightdope.com/t/i-pit-mortgage-companies/479698/26 "2009-01-03T18:52:03Z")
> [@gonzomax](#): > > So I borrow 200 k. I pay 1500 a month for 5 years. After 5 years I owe 200 k. That does not make sense. Unless you signed up for an interest-only loan (in which case, more fool you), then this is **not** going to be what happens. What you seem to want is a loan in which your principal balance is reduced by, say, 1/30 for each year of a 30 year mortgage. What people are trying to tell you is that this is not how loans are commonly amortized **because they are set up for level monthly payments for the life of the loan, because most people find it easier to pay a fixed and predictable monthly payment vs. one that varies over the life of the loan.** Let’s say you get a $300,000 loan at 7.25%. **Inherently** , during the first year of the loan, you are going to owe more interest than during the last year of the loan, because at the outset, the interest is being charged against almost the entire principal, whereas in the very last year, it’s charged against a tiny remainder of the principal. ---
**Author:** ![Huerta88](https://avatars.discourse-cdn.com/v4/letter/h/82dd89/32.png) [@Huerta88](https://boards.straightdope.com/u/Huerta88)\ **Post date:** [January 3, 2009, 6:57pm UTC](https://boards.straightdope.com/t/i-pit-mortgage-companies/479698/27 "2009-01-03T18:57:06Z")
> [@Huerta88](#): > > What you seem to want is a loan in which your principal balance is reduced by, say, 1/30 for each year of a 30 year mortgage. And as many people have mentioned, you **can** get or synthesize this by simply making additional payments against principal in the early years of your loan. You won’t have a level monthly payment, which most people seem to prefer, but you’ll pay down more of your principal as well as the initial high proportion of interest. ---
**Author:** ![Zulema](https://avatars.discourse-cdn.com/v4/letter/z/db5fbb/32.png) [@Zulema](https://boards.straightdope.com/u/Zulema)\ **Post date:** [January 3, 2009, 7:31pm UTC](https://boards.straightdope.com/t/i-pit-mortgage-companies/479698/28 "2009-01-03T19:31:23Z")
> [@gonzomax](#): > > 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. Part of your OP implies that because people move often mortgage companies should somehow change the way they collect interest on their loans. I’m not sure what you think they should change to because people are borrowing huge amounts of money and that requires huge payments. Maybe someone can find an amortization schedule for you to help you understand how loans and interest work. Every time I have ever gotten a mortgage, at least 6 times, I have received a breakdown of what I’m paying each month and the amount the loan will have cost at the end of the term, if I pay only the agreed upon payments. Even if the mortgage companies were somehow ripping us all off we are all agreeing to it when we sign the papers. If you don’t like how it works then rent a dive and save all your money to buy a house with cash. ---
**Author:** ![mske](https://avatars.discourse-cdn.com/v4/letter/m/ccd318/32.png) [@mske](https://boards.straightdope.com/u/mske)\ **Post date:** [January 3, 2009, 7:41pm UTC](https://boards.straightdope.com/t/i-pit-mortgage-companies/479698/29 "2009-01-03T19:41:46Z")
> [@gonzomax](#): > > So I borrow 200 k. I pay 1500 a month for 5 years. After 5 years I owe 200 k. That does not make sense. No - you do not make any sense. Amortization has been around for a long time as the chief way of repaying loans. This is not some recent, evil, mortgage company ploy to keep you in debt forever. Actually, it is simple math. [You could look it up if you wanted to](http://en.wikipedia.org/wiki/Amortization_(business)). ---
**Author:** ![clairobscur](https://avatars.discourse-cdn.com/v4/letter/c/839c29/32.png) [@clairobscur](https://boards.straightdope.com/u/clairobscur)\ **Post date:** [January 3, 2009, 7:53pm UTC](https://boards.straightdope.com/t/i-pit-mortgage-companies/479698/30 "2009-01-03T19:53:50Z")
> [@EJsGirl](#): > > 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, I do believe it can be the mortgage company’s fault, and that they can mislead the borrower. I remember such a situation being mentioned here in the medias. The loan had a variable interest rate that appeared to be capped but actually wasn’t. Despite reading the relevant clause in the contract, and the issue having been explained to me previously, I still had a hard time understanding why it meant that the interest rate wasn’t capped. And I don’t think I’m the most illiterate person around. IOW, I don’t think the average borrower had the slightest chance of figuring out that one, if it wasn’t clearly said to them upfront. Most people dealing with a large, respectable company reasonably assume that said company isn’t out to get them with the fine prints, nor intend to prey upon their ignorance. They expect the company’s agent to truthfully present the product. I’m not going to condemn the borrower for this trust. I would add that in the case I mentioned, the borrowers state that the product that misrepresented to them, which is difficult to prove. I don’t have a hard time believing them. Actually, I strongly suspect that the low-level employees who were selling it didn’t understand it, either, and were just parroting the sale speech they were given during the half-day “how to present our product-of-the-month the sales of your yearly bonus will depend on” training. Of course, this does not apply to the OP who either has troubles understanding how interest rates work or is referring to a simple interest-only mortgage, as all previous posters pointed out. ---
**Author:** ![aruvqan](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/aruvqan/32/2891_2.png) [@aruvqan](https://boards.straightdope.com/u/aruvqan)\ **Post date:** [January 3, 2009, 8:12pm UTC](https://boards.straightdope.com/t/i-pit-mortgage-companies/479698/31 "2009-01-03T20:12:19Z")
> [@Huerta88](#): > > And as many people have mentioned, you **can** get or synthesize this by simply making additional payments against principal in the early years of your loan. You won’t have a level monthly payment, which most people seem to prefer, but you’ll pay down more of your principal as well as the initial high proportion of interest. Actually I think I understand what the OP is meaning. What he feels is appropriate is a 30 year loan where he has 360 payments, each payment being 1/360th of the principal, and 1/360th of the interest. Therefore, he could look at any given time and see exactly how much of the total amount of the loan and interest is remaining. The sliding crap is confusing … we have been paying since 1991 and still have a sizable percentage of each payment going to the interest rather than paying on the principal. ---
**Author:** ![Giraffe](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/giraffe/32/129_2.png) [@Giraffe](https://boards.straightdope.com/u/Giraffe)\ **Post date:** [January 3, 2009, 8:18pm UTC](https://boards.straightdope.com/t/i-pit-mortgage-companies/479698/32 "2009-01-03T20:18:57Z")
> [@gonzomax](#): > > So I borrow 200 k. I pay 1500 a month for 5 years. After 5 years I owe 200 k. That does not make sense. If you borrow $200k, pay $1500/month for 5 years and owe exactly $200k at the end of it, then you took out an 11.1% interest-only loan and are, by definition, a retard. ---
**Author:** ![clairobscur](https://avatars.discourse-cdn.com/v4/letter/c/839c29/32.png) [@clairobscur](https://boards.straightdope.com/u/clairobscur)\ **Post date:** [January 3, 2009, 8:30pm UTC](https://boards.straightdope.com/t/i-pit-mortgage-companies/479698/33 "2009-01-03T20:30:41Z")
> [@aruvqan](#): > > Actually I think I understand what the OP is meaning. > > What he feels is appropriate is a 30 year loan where he has 360 payments, each payment being 1/360th of the principal, and 1/360th of the interest. I’m not sure how this would work. It would mean that the mortgage company accepts that the payment of interests will be delayed. That the interests due during the first year, for instance, won’t actually be paid until, say, the 5th year. Assuming that such a loan would be proposed, the interest rate would have to be higher to make up for the increased risk and delayed payment (the bank is making almost no money out of the loan during the first years, while the equity of the borrower is growing). ---
**Author:** ![clairobscur](https://avatars.discourse-cdn.com/v4/letter/c/839c29/32.png) [@clairobscur](https://boards.straightdope.com/u/clairobscur)\ **Post date:** [January 3, 2009, 8:39pm UTC](https://boards.straightdope.com/t/i-pit-mortgage-companies/479698/34 "2009-01-03T20:39:28Z")
Plus, it wouldn’t make any difference. After 5 years the OP would indeed owe less in principle, but he would owe instead several years of unpaid interests, which would be exactly the same as the principle : a debt. ---
**Author:** ![Stratocaster](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/stratocaster/32/16393_2.png) [@Stratocaster](https://boards.straightdope.com/u/Stratocaster)\ **Post date:** [January 3, 2009, 8:47pm UTC](https://boards.straightdope.com/t/i-pit-mortgage-companies/479698/35 "2009-01-03T20:47:07Z")
> [@gonzomax](#): > > So I borrow 200 k. I pay 1500 a month for 5 years. After 5 years I owe 200 k. That does not make sense. No, it does not, and it is also not how it works in real life, as has been pointed out to you by several people. ---
**Author:** ![Moirai](https://avatars.discourse-cdn.com/v4/letter/m/96bed5/32.png) [@Moirai](https://boards.straightdope.com/u/Moirai)\ **Post date:** [January 3, 2009, 9:14pm UTC](https://boards.straightdope.com/t/i-pit-mortgage-companies/479698/36 "2009-01-03T21:14:58Z")
I see your point, **clairobscur** , but I just can’t get my head around signing a contract with such a huge financial and legal responsibility attached to it without understanding _exactly_ what I’m signing. Thank God I am married to a very bright attorney, I guess. I’ll bet that plenty of people who took on suspicious mortgage products thought that they were somehow “beating the system.” Fools. ---
**Author:** ![Huerta88](https://avatars.discourse-cdn.com/v4/letter/h/82dd89/32.png) [@Huerta88](https://boards.straightdope.com/u/Huerta88)\ **Post date:** [January 3, 2009, 9:19pm UTC](https://boards.straightdope.com/t/i-pit-mortgage-companies/479698/37 "2009-01-03T21:19:44Z")
> [@aruvqan](#): > > The sliding crap is confusing … we have been paying since 1991 and still have a sizable percentage of each payment going to the interest rather than paying on the principal. You need to think of the interest as interest on a credit card or something like that – it is accruing every day. Naturally I as a lender am not going to say, in the interest of your paying down principal, I am going to defer the right to part of the year one interest that would otherwise be due on a very large amount of principal. Why? Two reasons: the time value of money (your agreement to pay me 1/360th of the total interest that might accrue in year 30 is much less valuable than paying me now what’s actually due today, viz., x% interest as against $y principal for the first year), and also the fact that most mortgages can with little or no penalty be repaid early so that I’d never collect the deferred interest in year 30 at all. The only way in which a mortgage differs from your credit card that you’ve run up a big balance on (well, the only one important here) is that the lender and borrower work backwards from a fixed length of time payment plan and agree upon a level-payment amount that will lead to the first payments going mostly to interest, the last payments mostly to principal, and the balance to zero at exactly the 360th month. ---
**Author:** ![Moirai](https://avatars.discourse-cdn.com/v4/letter/m/96bed5/32.png) [@Moirai](https://boards.straightdope.com/u/Moirai)\ **Post date:** [January 3, 2009, 9:38pm UTC](https://boards.straightdope.com/t/i-pit-mortgage-companies/479698/38 "2009-01-03T21:38:22Z")
And as a lender, I’m “trusting” you enough to lend you all this money- I’m sure as hell not going to wait until the end of the term to make my interest. Who knows if you’ll even make all your payments? You might decide that you got taken advantage of, and try to walk away. The lender gets paid _on the front end_. It’s good business, it’s the safest and it makes the most sense. ---
**Author:** ![Eonwe](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/eonwe/32/240_2.png) [@Eonwe](https://boards.straightdope.com/u/Eonwe)\ **Post date:** [January 3, 2009, 9:50pm UTC](https://boards.straightdope.com/t/i-pit-mortgage-companies/479698/39 "2009-01-03T21:50:01Z")
> [@Chief\_Pedant](#): > > If I lend you a million dollars and you agree to pay me 5% interest, you would owe me $50,000/yr just for the interest (I am simplifying this so you get it). If you paid me $4000/month for the next thousand years, you’d still owe me the million (actually a lot more) because you never even paid me the interest you owe, much less paid down the loan! Thanks for putting this clearly and in concrete terms. ---
**Author:** ![dgrdfd](https://avatars.discourse-cdn.com/v4/letter/d/eb8c5e/32.png) [@dgrdfd](https://boards.straightdope.com/u/dgrdfd)\ **Post date:** [January 3, 2009, 10:09pm UTC](https://boards.straightdope.com/t/i-pit-mortgage-companies/479698/40 "2009-01-03T22:09:06Z")
> [@suranyi](#): > > 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 Good for you. You are in a minority. > [@RaftPeople](#): > > But homeowners also get the additional value of the home due to appreciation (avg of 3% per year over the last 50yrs in the US). Of course. [Previous page](https://boards.straightdope.com/t/i-pit-mortgage-companies/479698.md?page=1) [Next page](https://boards.straightdope.com/t/i-pit-mortgage-companies/479698.md?page=3)