Although Gonzomax clearly doesn’t understand mortgage payments, I would like to extend his complaint.
Every time I move house, I have to pay the realtor, the lawyer and the moving company.
Every time! :eek:
these bastards are fleecing me! :mad:
Look, the moving guys are carrying the same possessions around every few years. Why should I have to pay them every time? 
These people should be grateful to have my business - they shouldn’t expect payment.
Yes, yes–the math in that cite was absolutely bizarre. I didn’t follow it all the way through, but those guys have to be selling something, to idiots who honestly think they’re paying 83%, or whatever, in the scenarios described. Let me make up MY own rate and math, it sounds like fun.
Divide the amount of principal left after each payment by the amount of that payment. Call this the Stratocaster Effective-and-only-really-true Interest Rate. In the example provided, you are being charged over 20,000% in interest after your first payment! Don’t you get it people? You are being royally fucked! Don’t let the banks, or any of the charlatans in this thread, tell you that’s not how interest works. Of course they’ll say that. Everyone is in on the plot to get you to pay over 20,000% in interest. This is absolutely criminal, now that I think about it.
Actually, it’s worse than that.
They’re redefining “interest rate” as “total amount paid per year” divided by “principal paid per year,” so in year one, their rate calculation is ($8,949.89 + $1,842.02)/$1,842.02 = 580%. The idea, I think, is that you’re only “benefitting” from the reduction in principal (through building equity), so the percentage you pay should be based on the $1842.02 you’re actually benefitting from, rather than the $150,000 base cost.
Which, of course, is retarded, because you’re actually “benefiting” from the entire $150,000. And (I think), they’re also counting the principal paid as part of the “interest rate.”
Why are we still doing this? He’ll never get it. It’s an entitlement thing, not a math problem.
That was real stupid.
Did you see where the Millers buy a 150k house and sell it in 5 years at 190k? Their math says that since the interest charges are $43,500 and they “made” $40k on the deal that they lost money!
Technically, they’re right. If you consider renting a $150k home for 5 years for only $58 a month as “losing”.
I think some of you are going at this the wrong way. The point is that it DOESN’T MATTER how much is paid toward prinicpal and interest in practical terms. Interest accrues and can be though of as being added to the principal. So a $200k loan at 5% accrues approximately $835 interest. So now $200,835 is owed. So if you make a payment of $1,075 then you still owe $199,760. Now there are other legal complications, but the idea is simple. You could have all of that payemnt go toward principle, but you would still owe the interest and the amount would not change.
Of course legally and practically this has implications and all sorts of other complications go in. But the bottom line is that you still owe the same amount and presumably the whole thing is still backed by equity ion the house itself.
This makes sense (I mean seems to be a sensible explanation of Gonzomax’s complaint…but of course, it’s the third time I believe I understood what he was complaining about, so of course I could be wrong again)
Could ** Gonzomax ** confirm that this is what he thinks ?
I think the real problem with this thread is that Gonzomax just likes complaining. Despite dozens of posters giving dozens of explanations, he still refuses to come in and concretely say what it is he’s complaining about. So while we’re all here giving specific answers to general problems, we’ll never figure out how to refute whatever his specific rant.
It’s just numbers.
The mortgage company loans you $200,000. If you take 30 years to pay it off, you pay $186,513 in interest. Yes, interest is a bitch but that’s how loans work. If you’d rather pay it off in 5 years the interest is only $26,454. Of course your payments will be $3,774!
If you’re going to pit mortgage companies, it should be for loaning money to people like gonzomax that don’t understand what they’re getting into.
You should stop taking out mortgages. That will show the fuckers you’re serious.
If you want to reduce your interest, pay extra each month. On many/most loans any extra you pay comes right off the principal each month, so you won’t have to pay interest on that amount each month for the rest of the loan.
Well, I will admit the OP is right about one thing (as much as that hurts after reading his posts). Buying a house on mortgage and selling it every 5 years is a losing game unless you have unnaturally rising housing prices.
I was explaining this to my wife yesterday. In a rational housing market without a large influx of jobs, houses should not increase in value much more than inflation + improvements. Rental rates should be less than the monthly cost of a new mortgage on an equivalent home, so you will pay more buying than renting. And to make a profit, you need to sell you house for enough more than you owe to compensate for taxes, commissions, fees, and inflation. Buying only becomes economically better because as inflation pushes up rents, your payments stay the same. And of course after you pay off you loan the payments drop to zero. I would estimate the break even point to be somewhere between year 7 and 10, depending on interest rates.
Jonathan
This is completely incorrect. In a rational market, why would you pay less renting than buying? Buying a house = taking up an equity position = more risk. Last time I checked people want to be compensated for risk, not the other way around. Otherwise why would anyone become a landlord, aside from expecting endless asset appreciation? If it costs less to rent than to buy, then it’s a good sign that the markets are overbought.
Because you are getting less.
Why should renting cost more than buying? If you rent, you are getting the same utility, but no equity. The only way I see renting being more expensive than buying is if they tightened up loan qualifications to ridiculous degrees without raising rates as well.
I am a landlord. I bought a rental house three years ago and I expected to pay more interest+insurance+principle than I got for rent for at least the first two years (and due to the economy I am still getting less in rent than the I pay out). Why would I do this? Well, first I am making more in rent than interest + insurance, so all my money goes to principle. Second, in an few years I will be earning higher rents than if I am now and will probably have a positive cash flow. Again, it is a matter of how long you hold the property. In a rational market the only time it would make sense to flip a house would be if you could add value to the property at a discount (e.g. if you were a general contractor and could renovate a house cheaper than the average person).
Jonathan
Missed edit window:
Think about it terms of a car. Leases are (and should be) cheaper than the payments to buy the car through financing. When you buy the car, you are paying for the use of the care for its whole life or the ability to resale it. Leasing is just for use during the period of the lease.
Jonathan
Because at the end of the day, they still own the house. Buying a house to rent it is an investment like any other. You have money. You invest it in whatever you want (for instance a house), get a return on your investment (the rent) and the equivalent of the money (the house) is still yours.
When you buy the house, the bank is loaning to you, say, 200 000. It asks you to pay, say, a 5% interest. If I rent the house from you, basically you're also loaning 200 000 (in the form of a house) to me. Why do you expect that I should pay for this the cost of loaning 200 000 $, plus the part of the principal you’re paying back each month, plus some more money on top of it?
Nevertheless, for some reason, that’s exactly what a number of potential landowners expect to do. And they feel cheated if the rent the market allows them to charge doesn’t allow them to pay their mortgage in full and make some benefit on top of it.
My irony meter just exploded all over my nice clean office.
Can you handle a spreadsheet well enough to set one up to simulate a mortgage? (Yes, there are websites, but a spreadsheet may show all the numbers a little better.) Put in a starting balance, an interest rate, and a monthly payment, and subtract the difference between the payment and interest payment from the principle for the next month. Maybe that will help.
BTW, the possibility of moving has nothing to do with anything. If you move, and buy a house with a down payment of the principle you have, (assuming house prices are the same) and your new mortgage has the same interest rate and monthly payment as the old, you will pay it off at exactly the same time as the old.
Some of my mortgage is with a bank, but some is with my father-in-law, and I compute the current principle and interest payments every month. I’m now paying more principle than interest, and the increase in principle payments gets bigger every month. Computing and meditating on the numbers might help you understand it.
Are you familiar with the term “risk premium”?
Generally investors don’t enter into hgihly risky cyclical enterprises like residential real estate with the goal of merely breaking even.
Instead of trying to wade through Strassia’s post with possibly differing definitions, let me clarify my terms usage. I am suggesting that to the rational investor, the Internal rate of return on their investment must be at least somewhat higher than the current risk free rate of return. So in Strassia’s example, the amount of rent collected triple net must exceed his cost of capital by an amount sufficient to compensate him for the risk. It is not clear from his post whether he is currently achieving this, but as stated above, it is simply common sense that when you buy a house, you at the very least expect to come out on top with more money in real terms than you started out with. Otherwise, why bother?
I think I understand what gonzomax is driving at.
I think he’s dead wrong, and doesn’t understand why he’s wrong, but I think I get what he’s saying.
You borrow $200k at 5% APR over 30 years
After 5 years of paying something like $1100 per month (a total of something like $65k), the amount owed has been reduced by only something like $17k
Why not take the amount borrowed (200k) and the total term interest (~$187k), add them together ($387k), divide into 360 equal payments, each of which pays off the same amount of interest and capital as all the others? The payments should cost exactly the same each month, except that after 5 years, the capital will be reduced by about $33k, not $17k!
The reason this isn’t possible is that it is, over that 5-year term, exactly equivalent to giving you a very much lower mortgage interest rate. Simple as that. If you buy out the mortgage after only 5 years, you have effectively borrowed the money at (I dunno) 2.5% instead of 5%.
The bank that does this will go bust.