I’ve just thought of a way that gonzomax can do what he seems to want to do.
Say he’s borrowing $120K at 5% interest, and he wants to pay it off in 20 years. Equal principle payments, the kind he seems to want, would be $500 a month.
The first month he pays the bank mandated interest, $500, plus another $500 for the principle payment. This will no doubt be more than what the bank wants, but should be no problem. The second month he pays $500 + the interest on $119,500. And so on. He might wind up having to pay a bit more principle at the end when the interest falls so low that the $500 + interest is less than the monthly payment, but that should be no big problem.
A bit more expensive up front (and considering the discount rate not really a great idea) but perfectly feasible.
Again, I think it matters what term you look at and what your goal is. I completely agree with you that 30 year fixed mortgages with low interest rates are what make it economically feasible to buy rental houses (at least in my case). I also have stated several times that rental property is a poor short term investment. However, with a fixed rate mortgage, inflation (which should affect rental prices as much as property values) means that my income will go up in relation to my outlay the longer I hold the property. Now if I bought at the height of the market (which I didn’t) or I bought in one of the more distorted markets (which I didn’t) then it may take too long for this to make sense. It may not be the best investment, but over the period I have owned it, it has done better than the stock market. Long term I think of more like a bond type of asset with a delayed coupon that increases over time. If I keep the property for 15 years I should have a 100% ROI (not inflation adjusted) and right now that looks pretty good. If I hold it longer, it becomes more of revenue stream than an appreciating asset, which may be what I need as I head into retirement.
I think we may be in agreement on the fundamentals, but expressing them differently, over the long run renting must cost more than buying or no one could be a landlord. I am just saying that for buying to make sense in a rational market you need to hold or improve residential property for it to be a wise investment because in the short run, renting is cheaper than buying.
Lets see. The mortgage company does not actually trot out the full mortgage. They are theoretically responsible for it, but do not take 200 k out. The mortgage is sold ,chopped and diced into an instrument that that is sold . Ergo derivatives. Then they sell swaps guaranteeing the unguaranteeable. Yes I have great respect for out financial experts.
But ,I know that most mortgages are done in 5 years. They know it. You guys apparently can not see it. Your thinking is based on a 30 year complete mortgage. If you take your time paying off a mortgage, and inflation continues, you will be paying the last years off with inflated and cheaper dollars. That is an advantage to the buyer. That is the only one.
But if I take out a mortgage and leave after 5 years, they make out big time. Most people leave early and they do make out on them.
Let’s say I have $200k sitting here. And my sister needs a house - she’s been a trainwreck, so so won’t get a mortgage - but she’s been steady for almost a year now, and she is my sister, so…(I wouldn’t, but let’s say).
I loan her $200k at 4% PER YEAR. I’ll even let her come up with the terms - she can pay just the interest each month, she can pay the principal. Just the terms are that I get 4% - she doesn’t pay, the interest gets added to the principal.
After 5 years she has decided not to pay down principal at all, and has paid me $40k in interest.
But had I not loaned her that money at all, I could have put it in a nice safe CD (she’s flakey, remember) - and maybe gotten 3% (maybe less right now, rates aren’t exactly going to make you rich right now - but then again, mortgage rates are really low too - and made $30k. Or maybe I have a higher risk tolerance, I put it into a mutual fund and get $80k.
How am I making out like a bandit with her $40k? - its kind of a lousy high risk investment.
So, they hand you $200k at 6%, and you keep almost all of it for 5 years, having set it up so you’re barely paying more than the interest, and now you’re upset at the fact that … 5 years of 6% interest on nearly $200k turns out to be a lot of money?
And you’re upset at them for not “trotting out the full mortgage”? Because a 30 year fixed mortgage is some kind of exotic instrument that’s hard to dig up info on? Because you’ve never looked at an amortization table? Because you plugged your salary into one of those “can you afford it?” calculators and it turned green so you clicked “Buy it now!”? Jesus Christ.
Suppose you won the lottery and got one million dollars. You decide to quit your job and live off that money for the rest of your life. you figure you will live for 30 years, so you put your money in a bank account that pays 5% interest and pull out 5300 dollars a month. In thirty years, you will have emptied the account, but what if you die after 5? How much should be left? By your logic, there should 833k left, but by normal math it would be 918K. Would that be ripping off the bank?
I think you are getting hung up on the house thing. Forget the house, if you loan the bank 200K at 5% per year, how much interest do you think they should pay the first year? The first 5 years? Forget the house, just pretend you are a bank that is holding the money in an account for them. That is pretty much what an interest only loan works out to be: a savings account for the bank. How is it a scam when they pay you the same way they expect to be paid. Now if banks would only pay term interest, but always charged compounding, then maybe you would have a case.
Put another way, if you open a savings account and close it after 5 years should they only pay interest on the amount you withdrew before you closed it or on the amount you actually had in there?
I think he wants them to charge simple interest, so that he pays the same amount of principle and interest each month with the interest spread over the entire term of the loan.
I suppose another way to look at it is: In such a competitive market as finance, if any bank could afford to give you a markedly cheaper mortgage, at the same time as remaining generally in profit, they would - because customers would flock to buy it.
The alternative is some kind of massive conspiracy or cartel.
Well, that’s what I was starting to think, but it seems that simple-interest mortgages may not be such a great idea either (cite - and actually that entire site is good to read for any question concerning mortgages and home-buying in general).
Calculating the best loan for your financial situation is a deterministic process but that doesn’t mean it’s simple. It’s easy to make mistakes, which is why I cut people slack (and request it likewise) when discussing financial strategy. But you can’t stomp your feet and claim you’re being cheated when you resist being informed and make bad decisions.
Why is anybody still trying to educate this guy? Did you actually read his last response? Was that even English?
It is absolutely beyond his capacity to understand the concept of how interest works. He will continue to regurgitate his non sequitur regarding how it’s the mortgage company’s fault if you take out a 30-year fixed rate loan, then bail after 5 years. Who cares if he thinks it’s fair or not at this point?
Quick question for you, gonzomax: what would be fair? If you took out a 200k loan at 6% for 30 years, with a payment of $1199 per month, and you dutifully paid for 5 years and then bailed out, how much of the principal do you expect to be paid off by that point? That is, what’s the balance? Apologies if you’ve already answered this somewhere; I don’t see it.