Why the end? You don’;t see options in the middle somewhere? Trust, You mean checking my credit and financial history is just blind trust? Cmon
No, I’m taking your word for it that you’ll pay me back, based on your past history. But that doesn’t mean that you won’t decide to say “screw it” and leave me with a house that, as a bank, I don’t really want.
Sorry, but you’ll never find a lender who will agree to anything but what you see us talking about. Whine all you like, but that’s reality.
Plus the house as collateral, but otherwise, yeah, it is kinda blind trust. Past history doesn’t necessarily indicate future performance, but it is a good indicator. You could have the best credit in the world, have something bad happen to you financially, and get your house foreclosed. They make the most money at the front end of the loan. You can always pay off the loan early and “cheat” them out of all the interest they thought they were going to get from you.
Checking your credit and financial history is not blind trust - that’s what got you the loan in the first place.
Really in truly, that is how loans (mortgages or otherwise) work. You are paying a percentage of the outstanding principal every month (think of it as renting the money) for the privilege of having the money at your disposal. In addition you are (if you are wise) giving back some of the principal every month so that in the next month the “rent” (i.e. actual $ amount of the interest) that you need to pay for the privilege of having the remaining money at your disposal is less. You typically adjust things so that the “rent” plus the principal you are paying back is a constant amount, which implies that the amount you pay to “rent” the money goes down and the fraction of the money you are paying back goes up.
If you decide that you want to pay down more of your principal, that does not absolve you of the need to continue paying “rent” (interest) on te principal that remains; it simply means that you need to increase your overall payments. I don’t get to decide when to pay my landlord rent for my apartment; you don’t get to decide when to pay the bank “rent” for your money.
You suggested a case where you could come out owing the same amount after five years as you did in the beginning. Just to add to your nightmares, if you aren’t even paying all the interest owed each month, you’ll owe more money over time. Nothing sinister, just the way loans work.
The concept that you are missing is that money has a time-related value. It costs a certain amount per unit of time to use someone else’s money. That’s what “interest” represents. Interest is the rent for the use of the money.
Think of it this way. Someone lends you $200,000. They have given you ALL that money up front. They could have done other things with it: bought property, invested in a business or bought stock. They decided to lend it to you. You both agree that you get all the money, up front, as long as you pay them 6% ($12,000)a year to use the money (again, keeping the fine points of the math very simplified).
Now the person lending you the money expects about $60,000 return over five years unless you pay some of it back sooner. This is because they could have been watching that piece of property increase in value, building that business or watching that stock go up.
What happens when you take out a mortgage is that you decide how much MORE (or less) than the $12,000/yr you are going to pay them. If you don’t pay them much more than $12k/yr, you are still using ALL of the $200,000 every year. They don’t have any of that money to put anywhere else. Their ONLY income on that $200,000 is the interest you pay.
There’s no scam here. If you think there is, save the $200K and see how comfortable YOU feel giving it ALL to someone buying a $200,000 house who is only going to pay 6% on it. They have a huge chunk of your money and all you are getting is $12K/yr. If their house goes up to $300,000 over 5 years, they’ve made a return of $100,000 on a $60,000 cost to them, AND they’ve essentially lived in the house free to boot. If they lose money, they might walk away and leave you, the mortgage guy, holding the bag.
Try being the lender and see how good a deal it is. It’s easy to have more of the principal paid down in five years. Pay more than the agreed-upon cost of using the money.
I took out a 15-year mortgage in May 2005. Since that time I have paid approximately 18% toward principal. At this point 47% of the monthly payment is principle and 36% goes to interest.
When I had a 30-year mortgage it felt like I was spinning my wheels since such a small percentage went toward principle each month. Part of that was due to a higher interest rate though.
gonzomax
Say I get a loan for $200,000 at 5%.
After 1 month I have accrued 200000*0.05/12 = $833.33 in interest.
Say I pay the bank $1075 at that time.
Is it fair or unfair that I owe the bank 200000 + 833.33 - 1075 = $199758.33 at that time?
gonzomax, it’s clear you have absolutely no idea how this works, and you’re either not interested in understanding or it’s simply beyond you. You’ve never actually had a mortgage, have you? How old are you, bub? Is this OP a recap of something you heard your dad bitching about?
He says he’s 65 in his profile…
Of course I know about mortgages. I even paid one off. I have had 3. When I brought that whole idea about what interest rates really are at a closing. the financial agent agreed with me. So the fact some of you see things from the mortgage companies side says a lot about you and your viewpoint.
If you see that a 200.000 loan is actually a million over 30 years, then take a mill divide it by 360 payments and apportion the payment properly.
Hey gonzomax, since you’re here, would it be a terrible bother for you to answer my question in post 47?
With a few approximations, a $200k mortgage at 6% for 30 years has total repayments of $436k, i.e. $200k principal, $236k interest. If I understand you correctly, you are saying that the monthly payments of approx $1,211 should be applied to the loan in the ratio 200:236 principal:interest, i.e. $556 principal, $655 interest.
Based on this, in the first year the mortgage company would receive $7,860 in interest, i.e. less than 4% return on the $200k it lent you. Why would it do this? It could invest in treasuries (in normal times) and earn more with no risk of default.
Of course, in later years the pendulum swings the other way. In the last year, you would be paying over 50% interest. Of course, you wouldn’t do this - you would long ago have refinanced or made extra payments to principal to avoid the usurous interest rate.
There is one way it could work: if the mortgage has huge early repayment penalties to compensate for the pitiful interest they are earning in the early years, and to prevent you from refinancing when the interest rates became high later in the loan. However, if they did this I suspect we would see I pit mortgage companies because of their punitive penalties.
LOL. Your confusion here really boils down to not understanding the word “properly” as used above.
Thank you. I didn’t have the strength to slog through all this. Gonzomax, please read this post 5 times and ask follow-up questions if you don’t understand it.
Eh, he’s just gonna be pissed forever because the big bad companies aren’t doing it his way. We are wasting bandwidth here.
Will you lend me a million dollars at 5% interest for the entire term of the mortgage? That is, over a forty-year period, I will have paid you one million dollars toward the principal, and fifty thousand dollars in interest?
That would be $2112.50 every month, for forty years.
No, I don’t think you will. If I find someone who will, though, I WILL have beaten the system.
More realistically, an amortization calculator showed me a million dollar loan, amortized for 30 years at 6%, and neglecting property taxes and insurance results in:
On an absolute basis, the amount of interest paid is approximately 116% of the principal that was borrowed. I suspect gonzomax might wish for a mortgage with those parameters to be advertised as a 116% thirty-year mortgage.
gonzomax, it’s fucking math. If a mortgage company effectively writes you a check for $200K, on a 5% mortgage, how is it wrong or unfair or whatever to charge you, in the first payment, for a month’s worth of 5% on the outstanding principal ($200K, at that point)? Where is the injustice in that? Again, do you understand that’s just simple math? If you have a 5% loan, the amount of interest due on the outstanding principal as every payment becomes due is–drum roll, please–5% (the monthly portion of it, anyway). That’s the frustration you’re detecting. It is as simple as that, really–5% loan? How much interest is due on outstanding principal at any given point? 5%!!! You want to reduce the principal faster? Then pay more than what’s due. There’s no evil plot here, just a boatload of ignorance.
Let me try to take a different tact here. I’ll come at it from the opposite direction. Gonzomax, I’m going to give you two different scenarios (technically one scenario has two subparts but I digress)
Scenario 1:
You buy a 200,000 house on a 5% loan. You elect to pay $1075 each month and, based on the way others have shown you interest is calculated earlier in the thread, you’ll pay it off in 360 months. A standard fixed interest 30 year loan.
Let’s say instead you elect to pay an extra $100 a month towards the loan instead. Now you’re kicking in $1175 each month. That’s $1200 extra dollars each year. $12,000 each decade. Follow me? In 297 months, or 24.75 years, you’ll have paid off the loan.
What’s that a savings of? Well, 5.25 years of payments for one.
But here’s the fun part: What would you still owe on your house at month 297 if you were only paying $1075? About $59,000. How much extra did you kick in, in total, by that point? 297 x $100 = $29,700.
You saved nearly $30,000 of your money that would go to the bank and paid off your house in full 5 years earlier just by kicking in an extra $100 a month. Boy howee, the bank’s gonna be pissed at you.
Scenario 2:
You have $200,000 you want to invest. A financial institution says that they’ll give you 5% on your money if you invest with them. How much would you like to earn on your money?
a) $10,000 over the lifetime of the investment? (5% of $200,000 is $10,000)
b) A small amount, say $2,000 in the first year, $4,000 in the second, and around about year 10 I can start accruing the interest that’s owed to me in full.
c) $10,000 a year. Every year.
d) $10,232.5 year one which is 5% interest compounded monthly. Then in year two, $20,988 because you’d want to earn interest on the interest.
You’d choose D right? You’d choose the one that made you the most money. Why wouldn’t the banks do the same?
Explain to me why you wouldn’t choose choice B which is exactly what you suggested banks do for you when they’re investing their money in you.
You have understood none of them.
You want your current payment to assume that you will keep the mortgage for 30 years. If you keep it for 30 years you will have paid, and the lender will have received, the same total amount of money.
But if your logic held true for how it should work, what I’m gonna do instead of holding that mortgage is take out a new mortgage every year for a million dollars. The math is apparently beyond you, but under your system I’d be getting the use of a million dollars for far less than the interest.
In round numbers:
At 6% a 30 year note with 360 payments works out to about $6400/month for a total of 2.3 million over the 30 years. Using the Gonzomax method of not letting the mortgage company rape me, after one year I want credit for paying 1/30th of my principal, or about $33,000. This leaves a little under 44000 or so for the mortgage company–about 4.4% (again, very round numbers to keep it simple). So after a year I bail and get a new mortgage, paying off the old one with the new.
And I get a million, every year, at 4.4%; not 6%. I like the Gonzomax system and I wish more Gonzomax’s were on the lending side of the biz.
Now that your mortgages are paid off, perhaps you have money to lend. Please PM me and let’s set something up.
Oh yeah; I wonder if the guy in your system who did decide to keep the mortgage all 30 years would be peeved if after 29 years he had to swap houses and found out he owed $44,000 in interest for a $33,000 balance.
If neither my nor the other examples dissuade you, there’s no help. You may as well just join the crowd convinced Big Business is ripping off the public, even if the real problem is that the Public is retarded.
Yeah, he smiled and nodded like he does at all the other crackpots ranting about the banks screwing everyone so you’d shut up and sign the papers. Good thing, too – this thread is evidence of how the conversation would have gone if he’d tried to explain to it you:
gonzomax: Interest rates are really a huge scam perpetrated by mortgage companies to steal our money!
financial agent: Actually, that’s just how the math of compound interest works. I know it’s frustrating, but there’s no way around it.
gonzomax: No, you never pay any principle! They steal your money and give you nothing!
financial agent: Uh, you do pay principle, it shows it right on your stateme…
gonzomax: You think they’;re giving me money? Cmon
financial agent: ::shoots self::