Where do you think the bank got the money to lend you for the loan? They got it by paying interest to other people. That interest could be as low as the 1% or less on savings accounts, but most banks finance their mortgages through securities (bonds) which paid 4% or 5%. So you paid the bank 6% and they paid their investors 5%.
This is how we got into this whole financial mess in the first place. You owe the bank $200k, and the bank owes someone else 200k. When you can’t pay, they can’t pay and the whole economy melts down. (And if we wanted a case to support a ban on all interest, I think we’re living it out right now.)
As for “owing” $400k on a 200k, that’s stretching the facts. If you pay the mortgage off early, they will not charge you the extra interest. The only liability you have incurred at the beginning is $200k. Interest is the price paid for the use of someone else’s money and doesn’t become a liability until due. So, if you follow the minimum payment plan, you will eventually have paid $400k, but at no time do you owe $400k.
Those numbers are often as different as ~3% for the bonds and >10% for the mortgages (our mortgages were 7.0% and 10.0% and we had flawless credit and were considered at the time to have gotten a good deal), but assuming your 1% difference, what’s 1% on several billion dollars? Gazookas.
Like I said, according to the terms of the loan. There are stipulations for in case you pay it off early, but unless you’re paying it off with another mortgage, that is not considered the norm.
You could, in that case, sell the house and avoid foreclosure, in which case there’s no “bonus” for the bank. If it’s worth less than you owe, the bank gets less then you owe by selling it. Again, no “bonus”. In fact, they take a loss.
As has been pointed out, that’s not true. If you continue to hold the loan, you’ll have to pay the interest you’ve agreed to along the way, so of course the total amount you’ll pay is more than you’ve borrowed. That’s interest.
Right, most of that first $20,000 goes to paying the interest that you agreed to pay.
Hard to see how you’d owe more, or even exactly the same (unless you have an infinite-term loan). Now, if the value of your house decreases, the difference between your home’s value and what you owe could be more. But that’s just the loss you’ve taken because you bought something whose value has decreased; it has nothing to do with the loan.
See above. 2. They make interest on the loan. Do you think it unfair that interest rates, determined by the market for loans, are greater than the cost of payroll?
Maybe this is heading more into GD territory, but haveyou heard of the concept of household budgets and savings accounts? If you saved 10% of your income (as some countries in the world do), you’d be saving at a higher rate than the growth in housing values, and it would just be a matter of doing that for a decade or two before you could buy yourself a house out of cash. In fact, the banks would be paying the interest to you on your savings.
You can only call mortgages “zero choice” if you accept that having a negative savings rate is mandatory. It isn’t mandatory. We choose how much to spend and how much to save. widespread overspending is just a mass psychosis that a whole culture bought into. I really, really hope this recession has imparted a lesson that will stick.
Refer back to “mass psychosis” for my opinion on everyone* who took one of these loans. The same goes for ARM options.
Actually, not everyone. Some people were talked into these kinds of loans by unscrupulous mortgage brokers who broke the law through their failure to follow disclosure laws. Those brokers should be in jail, but for some reason they’re not.
You may be on to something there, but it’s just not the way our culture works right now. No 24 year old is going to think of that. Especially not when they want to get married, start a family, “be an adult,” and are already racked with student loan debt. The number of young people who buy a house with cash without starting off rich in the first place must be microscopically small. I’ve personally never heard of anyone under 50 doing that. I wish this would change too, but I have a feeling I’m going to keep on wishin’ until the day I die.
I’m not sure what we’re discussing here. Do you think charging interest on mortgages should be illegal? Do you think that interest rates are determined by something other than market forces?
I’ve heard of interest-only loans; that’s what I meant by “infinite term”. I didn’t know that people took negative amortization loans. That amounts to letting interest accrue (which, not surprisingly, leads to owing more than you borrowed). It’s all just interest.
You seemed to suggest that there was some sort of sleight-of-hand because you didn’t owe any less after having paid just interest. That’s like paying just the interest on your credit card bill and getting angry at the credit card company because you don’t owe any less. (And then saying that you had no choice because it’s the only way for somebody without a trust fund to obtain those goods and services)
I don’t know who to side with on this one.
As an atheist, I think all religious injunctions are bunk, and should be replaced with rational discussion of what’s permissible to make society run smoothly.
On the other hand I think credit is a curse because it encourages gambling. “If you loan me some seed now, I bet it will turn into that much and more by harvest time” But of course it never does.
Given that something like 98% of loans are paid back (plus interest), it can be said that at least 98% of the time there were more seeds later than earlier. The rise of technology is largely thanks to loans. It’s a way to prospect on the future, where you assume that the future you has a new skill or new invention or whatever and hence can make more money than the loan is worth. In the meantime, the loan finances your ability to go to school or develop the invention.
The effort to block interest-based loans is possibly one of the worst pursuits that there has ever been in the history of mankind.
the key point in a heter isca (permit for Jews to loan to each other at “interest”), is that it is a business partnership. the borrower is to invest the money in whatever pursuit he needed the loan for, and split the proceeds with his business partner (the lender), at an agreed upon rate, which serves as the “interest” without actually being interest on a loan per se.