That works great if there is no inflation, or if the loan isn’t paid off earlier. Since inflation is pretty common and very few 30 year installment loans are held and paid without change to the bitter end, your suggestion would require much recomputation; i.e., no good.
So it is not a home mortgage at all. If I pay for 5 years and have paid zero on my home ,you are fine with that. I am paying off a right to a loan and a loan only. My loan rate for that 5 years is what,100 %. It is not 5 1/2. If I move, I have paid all my money for the right to have them lend me money. They take every dime and I have paid zip on my house.
OK, you keep saying this. Is this an interest-only loan or not? If not, how can you have paid zero on your house?
If you have paid zip on your house after 5 years it’s because you NEVER PAID ANY MORE THAN THE COST OF RENTING THE MONEY.
HELLO!! HELLO!!
I’d give up trying to explain it, but if you are bright enough to post sentences surely you are bright enough to understand this.
YOU AND ONLY YOU decide how much more you want to pay on a loan of any kind BEYOND THE COST OF RENTING THE MONEY (Cost of renting money is commonly called “interest.”)
Assuming you can find someone who will lend to you at terms you agree to, the COST OF RENTING THE MONEY per month plus the amount you pay above and beyond the COST OF RENTING THE MONEY is called your “total payment.”
It’s your total payment that determines how long you are going to end up renting that money if you don’t pay off the loan early. This is called the “term of the loan.”
So if you only pay for the COST OF RENTING THE MONEY every month, you will NEVER (gasp! horrors! cheats, even!) pay off the loan even if you make payments for a million years.
If you make payments according to the original term, you’ll be done with the loan at the end of the agreed-upon number of payments.
If you pay MORE than the agreed-upon payments, guess what, Gonzomax? You won’t have to make as many payments!!
The less you pay over the basic COST OF RENTING THE MONEY, the longer it will take to pay off the loan because you are only reducing the amount of principal by a tiny amount at a time and it takes a long time to get the total payment to the point where it’s reflecting that you’ve actually reduced the principle. But at the end of the term, don’t worrry; the same total payment will reflect that you are paying almost all principal.
I am determined to make this sink in. But a little part of me is worried Giraffe’s scenario is right on the money, and I am the loan officer. Assembling my shotgun now…
If you have a home loan at 5% and pay for five years you now have a mortgage that is $183,657.73 so that is a little more then zip isn’t it? So you have paid down in that 5 years $16,342.27 and if you paid for 5 more it is over $37,000 paid on the principal.
Go to a simple mortgage calculator…wait here’s one you can try.
then come back here with some data rather than bullshit. You make yourself and your position look silly when your argument is so easily refuted. I know you ‘feel’ like you aren’t paying anything on the mortgage–that is natural. Hell I felt that way on mine too, but you keep on paying it and it goes down. Plus side is that your equity also goes up. Another plus is the interest write off on my taxes. Right now my house is almost paid off! woo-hoo–and they house has doubled in value to what I paid for it.
Maybe you should stop moving or refinancing every five years.
God bless you, then. This has been explained and re-explained so explicitly, so many times, by so many people, only to have gonzo come back to repeat, “So, then you think it’s fine that my principal stays the same after 5 years of payments?” that it appears to be a lost cause. At first I thought he was trolling, now I just think he’s a dope.
Those numbers are wrong. If you borrow $200k at 6% for 30 years, these are the consequences after 5 years and 30 years.
- After 5 years you do not still owe $200k. You owe about $183k. You will have paid off $17k.
- After 30 years it does not “turn into a mill”. After inflation, the real interest is about $167k.
So basically, everything you have written is factually and mathematically incorrect. Go over here, play with the calculator app, then come back with accurate numbers that you believe supports what you’re saying. Karl's Mortgage Calculator
http://www.teamlivingwater.com/Banking_secret Heres an interesting article on the very subject.
Years ago I read about a plan of paying double payments,but you designate your second payment to be payment 360. Then next double payment to be payment 359 etc. Then your double payment actually would cut the principle. Mortgage companies quickly caught on and made that not possible. But for a while it was. Then the question is did they actually loan the money you are paying off 30 years in the future?
You’re sort of an idiot, aren’t you?
I have a (rhetorical) proposal for the OP:
You give me $1000 tomorrow, and I’ll give you a dollar a year for the next million years.
But seriously, I agree with everyone else in the thread that it’s just math. I do agree it’s a bit frustrating how little the principle balance goes down every month.
Gonzomax: an airplane is on a treadmill that is the length of a normal runway. Next to that airplane is another airplane of the same type on a normal runway. The treadmill moves backwards at exactly the same speed that the airplane on the normal runway (i.e., the one not on the treadmill) moves forward. Both planes turn their engines full on for takeoff. Does the airplane on the treadmill take off?
It does not contradict anything anyone has said here.
You can still pay down the principal early along this same schedule and pay off the loan in half the time. AFAIK it’s very rare for banks to penalize you for paying off early. I’m on my 3rd mortgage and it’s never once been a problem. I don’t know where you’re getting these ideas.
I’m trying to understand what you are saying, but failing. Let’s look at this another way.
If you borrow money, you pay for the use of that money, which is called interest. Eventually, you will have to pay back the entire amount you borrowed (the principal) plus the interest.
There are several ways to accoomplish this. One way is to wait for the entire term of the loan, then pay back the principal plus the interest all at once. Let’s say you borrow $100 at 5% annual interest for one year. After the year has passed, you pay back $105. With me so far?
Another way is to pay back part of the principal each month, with the interest you owe up to that time only. After each payment, the amount you still owe has decreased, and since you pay interest only on what you still owe, your next interest amount will be less than before.
Sounds complicated, but there are formulas that work out the amount of principal and interest each month in such a manner that each payment, the sum of P & I, is the same. But each payment has a different amount of P and a different amount of I than the last time.
Your very first loan payment will be largely (but not entirely!) interest, since you still owe the full amount. But your next interest payment will be less, since you don’t owe as much anymore. By the time you get near the end of an equal-installment-payment loan, most of your payment goes towards principal and very little toward interest. It all works out mathematically.
Do you understand this so far? If not, there’s no use continuing. Get this under your belt first.
In your example, your numbers are faulty. After 5 years of equal-installment payments for a 30 year, constant interest loan, you will have paid some (not a lot, but some) of the loan principal off, not “zero”. If you don’t believe me, check the mortgage statement, which should itemize the amounts charged for each purpose.
This is stunning. I am now convinced that there must be EXTREMELY stringent government regulations on mortgage lending. People like gonzomax must not be allowed to borrow money if they cannot understand the consequences of doing so.
BTW I think there are plenty of reasons to pit mortgage companies, but this thread doesn’t cover them.
You are a crazy person. Even if you literally made no progress on the principal of your loan, that doesn’t make your interest rate 100%. It seems like you don’t even know what these terms mean.
You don’t understand what the interest rate means.
Let’s use your suggestion of 100% and find out what would really happen if you were paying 100% interest. I’ll use simple interest for now; lenders use compounding interest in real world loans and mortgages, but simple interest will serve our purposes.
Please note that interest percentage is an annual amount applied to the outstanding principal.
If a lender provided a loan for $200,000 at 100% interest (they would be shut down and charged with usury, but I’m making it more complicated than it needs to be), the loan recipient would be required to make payments of $200,000 in interest alone during the first year.
100% (simple) interest on a loan of $200,000 would require $200,000 of interest payments during the first year of the loan or $16,666 per month.
If you have an interest only loan (never paying anything toward the principal of the loan), you will pay this monthly amount in perpetuity. Eventually, the lender will want their 200k back, but let’s not cloud the issue.
Now - let’s try something.
Suppose you want to pay back some of the principal. Perhaps you can aspire to pay back the original $200,000 and own this house eventually.
To do so, you will have to be able to afford to pay an amount over and above the 100% simple interest rate that you’re paying. How much was that again? That’s right $16,666 per month or $200,000 per year.
Let’s say that you can afford an extra $1,000 per month.
Keeping in mind that we’re using simple interest.
Year one. You make 12 monthly payments of $17,666 per month (total $212,000 for the year).
You have covered your interest and made an additional $12,000 in payments, applied directly to the principal.
At the start of year 2, you owe $188,000. This is the remaining principal after you made $12,000 in payments over and above the interest owed in year one.
Now, how much interest are you going to pay this year?
Your loan amount is $188,000. You are paying 100% interest. You owe $188,000 interest this year.
You are going to continue to pay $17,666 per month ($212,000 for the year).
How much of your payment is going to be applied to the principal and how much is going to be applied to interest?
Interest owing for the year is $188,000. Monthly, that comes to $15,666.
That means that in year 2, your payments of $17,666 per month will see $15,666 going toward your 100% loan and $2,000 per month going toward repayment of the principal.
Do you see how a reduction in the principal from year one to year two results in a reduction of the interest payments required to service the loan during year 2?
This reduction in interest required means that even though your monthly payment remains constant across year one and year two, more of that payment can be applied to the original loan. Which means you have paid down $24,000 against the loan in year two, in addition to the $12,000 in year one.
Start year 3.
Your original $200,000 loan has now been reduced by $12,000 (year one) and $24,000 (year two) and you have a balance of…
That’s right. $164,000
At 100% interest, how much are you going to need to pay in interest during year 3 and how much is that going to be on a monthly basis? While we’re at it, how much of your $17,666 monthly payment is going to be apportioned to interest and how much to principal?
$164,000 (100% interest) divided by 12 = $13,666 in monthly interest payments
$17,666 - $13,666 = $4,000 per month applied to outstanding principal
Let’s carry this through to see how long it will take you to have repaid the entire $200,000 loan using 100% simple annual interest and constant $17,666 per month payments.
Start year 4
Principal $116,000
Interest $116,000
Payments made $212,000
Start year 5
Principal $20,000
Interest $20,000
As you can see, you will only need to make payments totaling $40,000 during year 5.
Congratulations. You now own the property outright. Your loan is repaid.
They did? That’s fascinating since I paid off my mortgage early doing a combination of that and bulk payments. If anyone tries to sell you a loan with penalties for prepayment, walk away - plenty of reputable banks will allow you to pay against principal.
Wow. I think I am going to become a money lender, with people like gonzomax in the world I could have a Ferrari with baby tiger skin seats by the time I would be thirty. What does being that stupid feel like, I’ve always imagined it to feel like a hamster, always running in its wheel but never getting anywhere.
Anyway, because I have excel, and because I like math I have developed the loan you want. Suppose you have borrowed 200k for thirty years at 5.5%, and want to have paid 25/30 of the principle at year 5, 20/30 at year 10, and so on. If this is what you want, all you need to pay is:
Year 00 -> 05: $1 400.59
Year 05 -> 10: $1 247.82
Year 10 -> 15: $1 095.04
Year 15 -> 20: $0 942.26
Year 20 -> 25: $0 789.48
Year 25 -> 30: $0 636.71
FYI, the uniform payment is $1 135.58
The math is simple .thanks for pretending I can not grasp it. The fact is a front loaded mortgage is to the benefit of a lender who knows most will not stay for full term. It results in paying interest that is far higher than what is stated. If you stay 30 years ,you can probably justify the 5 %. But most people do not. So the company benefits big time. Do they loan money for 30 years. Not very often. The fact is few pay full term. So if the mortgage is aborted due to moving ,the amount of interest paid is far above 5 %. Is the math really too difficult for you to follow.
I buy a home and in 5 years pay 70 K . My principle stays approx. the same. I get a new home and a new mortgage. Starting over. Now what did I pay at the last home. If you think paying 70 k and then leaving with no equity is a great deal. good for you.All I did was pay. I generated no wealth, very little equity. But what did I pay. 5 %?
Interest is stated as an annual amount, not an amount over the term of the loan.