patrick.net

SFace says

No it won't, they just receive 3.2% interest instead of 5% (3,200 interest on 100K principle). In the 20th years when loan balance is 33,000 and interest is stil a flatl 3,200, am I obligated to pay 10% interest rate?

Your method will work, only if banks double your borrowing cost and/or have obscene pre-pay penalty. The current amort method assures the lowest interest rates.

Like I said I'm not in finance but how does making 32k in interest on a 100k investment in 10 years amount to 3.2%? I agree though that the pre pay penalty would have to be high, clearly no one expects the mortgage to fully amortize which makes the front loading of interest even more awful for the borrower.

BayArea says

At the end of the 7yr period for example, you gave the bank $41,808 in interest, you paid $20,177 in principle towards the house, and you still owe them 87% of the original amount of the loan. Can the bank be positioned any better?

And yet we all sign up for this willingly, lol ?!

Well, when you rent... you pay 100% essentially in interest.

Say you rent a 2 bedroom apartment for $1700 a month in LA area (average rent i believe)... Or have a $360K loan at 4% interest...

You are paying the same in principal and interest as renting... Except instead of the full $1700 going to a landlord... With the home loan you are at least pumping $528 a month into your home equity.

The loan amortization isn't the problem.. it's basic math. Car loans work the same as home loans... Atleast with a home loan you get to deduct the interest payments and historically home prices rise overtime unlike cars.

But its not basic math. My numbers show that the same loan, interest rate, total interest paid, length of the loan can be paid monthly at the same cost with two very different interest:principal ratios. The bank's way front loads all the interest. At the end of the loan you pay back all the principal and the exact same amount of interest. All that differs is the way the interest is paid. I'm really surprised people are so ho hum about all of this.

I understand the current system will never change and it keeps rates down overall but if you were moving every 5-10 years the equal interest:principal calculation is the far better deal for you, and this is why it doesn't exist as an option. Rents and all that is irrelevant to me who doesn't think in cash flow or ROI but what the total bottom line is. How much will this house cost me? Shoot they could even have some type of pre-pay fee at closing. I suppose in the end the current amortization approach makes things simpler for the buyer, but at what price?

BayArea says

I am illustrating the amortization of a $150K loan (4.25%) over 30yrs. Note that after your typical 5-7yrs of homeownership, you have paid:
Interest: $30,486 - $41,808
Principle: $13,788 - 20,177
Amount owed to Bank: $129,823 - $136,212

You (or we) as homeowners owe Interest on the outstanding balance each month. Yes, up front interest piece is higher portion of payment vs tail end of your loan. Its not rocket science.

atst1138 says

But its not basic math. My numbers show that the same loan, interest rate, total interest paid, length of the loan can be paid monthly at the same cost with two very different interest:principal ratios. The bank's way front loads all the interest. At the end of the loan you pay back all the principal and the exact same amount of interest. All that differs is the way the interest is paid. I'm really surprised people are so ho hum about all of this.

No, you're getting this all wrong and don't really know what you're talking about. Sorry to be blunt. You just aren't doing the math right. The principal is higher at the beginning, so you must pay interest on more principal at the beginning. Thus, you pay down less principal at the beginning.

Let's say you get $125K house with 25K down, for a loan of $100K.

The equivalent interest in your first month at 4% would be 4% of $100K divided by 12 = $4000/12 = $333.33.

Halfway through the loan, the principal remaining is $64,542.80 before you make your 181st payment. So 4% of that divided by 12 = $2581.71/12 = $215.14.

If you have level payments, you will necessarily pay $333.33 - $215.14 = $118.19 in principal extra for that 181st payment than for that 1st payment.

The problem is that you're being ho hum about the way interest is being paid. You cannot allocate the interest willy nilly as you are suggesting because otherwise you will be accruing interest (negative amortization) early in the loan and paying more interest later in the loan. Why should the bank take the risk of negative amortization (most recent real estate boom excepted)?

If you want more principal paid in the early months, you would need to make larger payments early in the loan and smaller payments later in the loan. For example, let's say you wanted to pay principal evenly through the 30 year term. $100,000 over 360 months is $277.78. So in month 1, you would pay $277.78 (of principal) + $333.33 (4% of $100,000 divided by 12) = $611.11. Then in month 181, you would pay $277.78 (of principal) + $166.67 (4% of $50,000 divided by 12) = $444.45. If you give up level payments, you can have more principal early on.

atst1138 says

So let's take 100k, 30 years @ 5%. Total interest is 93255.78. Monthly payment is 536.82 (100,000+93255.78 divided by 360), half goes to principal half goes to interest.

This makes no sense. If you pay $536.82/2 = $268.41 in interest, you are only paying 3.221% interest that month. Why? Because $268.41*12 = $3220.92.

It seems like the real reason a payment remains the same in an amortized loan is to disguise or obscure the amount of interest the borrower is paying to the lender. This is probably why Regulation Z (otherwise known as the "Truth In Lending Act" or TILA) came about - which shows you the overall interest you pay to the lender over the life of the loan. Perhaps the perception -prior to the passage of this bill (1968) - was that lenders amortized loans were not so "truthful" to the uninformed public?

There are other payment stratagies to use, however. For example, it is said that if you make one extra payment per year, you can shave 5 1/2 years off the amortized schedule on the loan - so a 30 year loan effectively becomes a 24 1/2 year loan, etc...

See here:
http://www.bankrate.com/brm/news/DrDon/20030506a1.asp

Yeah it couldn't be equal interest and principal each month if the total paid is different (100k vs 93k).

Rather then try to resurrect this idea, is there ANY other way to conceive of a mortgage product that was more conducive to American home ownership behaviors? I suppose the 10 year ARM will be the answer.

Everone wants a free lunch but not the obligation to pay !

No wonder our credit has balloned.

Oh well..

lotr1978 says

Rather then try to resurrect this idea, is there ANY other way to conceive of a mortgage product that was more conducive to American home ownership behaviors? I suppose the 10 year ARM will be the answer.

How about bi-monthly payments on a 15 year loan (if it's affordable)?

lotr1978 says

Rather then try to resurrect this idea, is there ANY other way to conceive of a mortgage product that was more conducive to American home ownership behaviors? I suppose the 10 year ARM will be the answer.

Thats why the Mortgage Int% Deduction was created.

lotr1978 says

Rather then try to resurrect this idea, is there ANY other way to conceive of a mortgage product that was more conducive to American home ownership behaviors? I suppose the 10 year ARM will be the answer.

Depends. If you know you will stay 5 years, the 5/1 ARM might make sense. Similarly, if you know 7 years, 7/1, and 10 years, 10/1.

PenFed has an interesting ARM -- a 5/5. Oh, and it looks like they just added a 3/5 ARM, I hadn't seen that before:

https://www.penfed.org/productsAndRates/mortgages/mortgagecenter.asp

There is a 2% cap on the 5 year reset, and an overall 5% cap on total interest rate resets. The 3/5 starts at 3%, so in 3 years, your max rate would be 5%, and in 8 years, your max would be 7%, and in 13 years, the max rate would be 8%. The 5/5 works similarly, but is at 3.375%, so in 5 years, your max would be 5.375%, in 10 years, 7.375%, and in 13 years, 8.375%. Could be a risk worth taking, if you're pretty sure you won't stay longer than 8 years for the 3/5 and 10 years for the 5/5. Either 5% or 5.375% would still be very low by historical standards, and it's not guaranteed to get there. You can also re-evaluate upon the first reset, of course, if you don't have a set timeline.

AND...they do it all with 'conjured' money! Now THAT'S a racket!

SNL19067 says

AND...they do it all with 'conjured' money! Now THAT'S a racket!

True SNL the paper is the swindel. All of the natural resources they take have value. Things you want and need. They use the paper to swindel those resources from other countries and this one. See its the time value OF LABOR for that resource. Above example a house that took 3 MONTHS TO BUILD with swindeled material. TAKES YOU 30 YEARS OF LABOR TO ACTUALLY OWN IT. See if they own everything down and up the fucking block. Then its your LABOR they want giving you little as possible for it (see mark ups). The more they give you by the way the more they own you. No one owns their house that they don't own. IE if they can throw you out. Take your car. It ain't really your house or car.

BayArea says

Hi folks,
The topic is on mortgage loan amortization.

Hey Bay area.

Also try this caluculator it gives in plain how much interest you pay. Thats bankrate it appears and that is the fucking wolf believe me.

http://www.amortization-calc.com/

Many here do not understand amortization.

Lets say I borrow $100 from you at 12% annual interest (1% per month). A loan like that amortized over on year has a monthly payment of $8.88/mo.

The first month I owe you the 1% interest on the $100.00 or $1.00 so $7.88 of my payment goes to principal.

The second month I owe you $100.00 minus the $7.88 I paid you last month so my balance is $92.12. This month I owe you 1% of $92.12 or 92 cents of interest. I pay you my standard $8.88 so $7.96 goes to reducing principal.

The third month I owe you $92.12 minus the $7.96 principal I paid you on the second month so my balance is $84.16. My 1% interest due on that balance is 84 cents...

I don't know if you can get the gist of this but the reason interest seems front loaded is that you have to pay the interest on the money you owe and you owe more at the beginning.

You could devise a loan where you pay half to interest and half to principal (or any combination like that) but the payment would not be fixed. If you borrowed $100,000 at 4% with that program you would owe $333.33 in interest the first month and $333.33 in principal for a total payment of $666.67 the first month. The second month your payment would be $664.44 and it would continue to fall each month. The fixed payment on that same $100,000 loan would be $477.42.

BTW: APOCALYPSEFUCK is Tony Manero, your payment on the $5 million loan amortized over 100 years is about $17,000 per month.

Here it is Bay one bitch'n calculator. Took me a while to find. Bank rate is confusing to say the least try this one. This sums it up and spells it out for the most part. Try looking at that debt service constant. Curious thing isn't it?

http://www.bretwhissel.net/amortization/amortize.html

It doesn't round to the nearest cent so be careful. They would not want to cheat you out of one cent.

It's mortgage "principal."

Principal. Principal, principal, principal.

I don't need to hear any more about mortgage "principle."

Amortization is just a way to mathematically figure out how to make a series of payments equal over the life of a loan. The formulas are also helpful for other investments. ie: lets say you run a small restaurant, you are offered a new espresso machine that you believe will make you $200 per month in extra profit. The machine will last 5 years and costs $10,000. The return on that $10,000 investment is 7.42%. If you think you should be making a 15% return on investment you would either have to pay $8407 for the machine or figure out a way to make $237.90 per month off of it.

Very handy formulas for many things besides loans.

Here are the formulas to solve for each variable:

P = A * ( R - 1 ) / ( 1 - R-N )

Similarly, other amortization formulas are as following:

Amount (A):
A = P * ( 1 - R-N ) / ( R - 1 )

Term(N):
N = -ln [ 1 - A ( R - 1 ) / P ] / ln[ R ]

Payoff (or balloon) (P[n]):
P[n] = (A - P * ( 1 - R-n ) / ( R - 1 ) ) Rn

Amount owed after n payment (A[n]):
A[n] = ( A - P * ( 1 - R-(n-1) ) / ( R - 1 ) ) R(n-1) - P

A = payment Amount per period
P = initial Principal (loan amount)
r = interest rate per period
n = total number of payments or periods

Of course, if the numbers were reversed as in a 10 year loan, the payments would be $1,500+, the majority of which goes to principal. The reason people sign up for 30 year loans is to keep their monthly payments managable; and, if you want to pay more in principle (as your financial circumstances improve) you can always make extra payments which become direct principle reductions.

yes....a 30 year note is likely going to appear to benefit the bank more than you. however, you need the loan and the bank has the $. it's really that simple. amortization makes perfect sense to me. it's math. just my own opinion, but if i were planning on only staying in a home for 5 year, then i would rent. i bought (or borrowed rather) a home because i plan on staying long term. i could pay $1000/month for 30 years and own a house at the end.....or i could rent the same home for $1000/month for thirty years, and then continue to rent it for the rest of my life.

i view it as somewhat part of my retirement plan. i realize that things could change....but the goal to me is to have no payment, neither rent nor mortgage, when i retire.

auto loans are much more in line with the average amount of time you will have that vehicle, and because of this you pay significantly less interest, as a % of the principle, than you do on a home with a 30 year note. so do a 5-7 year loan on a home and you will pay MUCH less to the bank in interest.

and i don't believe that anyone has pointed out that you also receive the greatest tax benefits in those first 5-7 years. now i'm not big on the tax breaks of homeownership (for the median home, it is very little more than the standard deduction), but if you do itemize, then you are writing off more interest in those first 5-7 years as well. just thought i'd throw the tax thing in to the discussion. (nevermind the fact that you can sell a residence for a large gain, tax free)

Thanks Jonny G for confirming the relationship between stable payment and amortization. My math was wrong, hastily done. I get the concept of amortization but am interested in exploring other options which don't seem to exist. Many posters suggest there is no other option because of the math - I get it, you owe more at first so interest is higher up front. But your example here

>>>>>>>>
You could devise a loan where you pay half to interest and half to principal (or any combination like that) but the payment would not be fixed. If you borrowed $100,000 at 4% with that program you would owe $333.33 in interest the first month and $333.33 in principal for a total payment of $666.67 the first month. The second month your payment would be $664.44 and it would continue to fall each month. The fixed payment on that same $100,000 loan would be $477.42.
>>>>>>>>

I assume this earns the bank less interest overall? If given the choice why is a DECLINING payment ever a bad thing? In this scenario if you can afford payment 1 then surely you can afford the remaining 359 payments that are trending lower. Essentially it would require a broker to layout two options for a fixed rate mortgage.

If you pay your mortgage according to the terms that the bank gives you, you're as much a sucker as if you paid your credit card statement according to the terms the bank gives you.

HydroCabron says

It's mortgage "principal."

Principal. Principal, principal, principal.

I don't need to hear any more about mortgage "principle."

Does your computer talk to you?

atst1138 says

I assume this earns the bank less interest overall? If given the choice why is a DECLINING payment ever a bad thing? In this scenario if you can afford payment 1 then surely you can afford the remaining 359 payments that are trending lower. Essentially it would require a broker to layout two options for a fixed rate mortgage

I gave another scenario like this above:

corntrollio says

If you want more principal paid in the early months, you would need to make larger payments early in the loan and smaller payments later in the loan. For example, let's say you wanted to pay principal evenly through the 30 year term. $100,000 over 360 months is $277.78. So in month 1, you would pay $277.78 (of principal) + $333.33 (4% of $100,000 divided by 12) = $611.11. Then in month 181, you would pay $277.78 (of principal) + $166.67 (4% of $50,000 divided by 12) = $444.45. If you give up level payments, you can have more principal early on.

You could do this yourself. Just pay more than your fixed payment in the early months and have the bank apply it to principal. Why would a broker need to lay out this option?

Of course it earns the bankster less interest -- you are paying off principal faster. Any time you pay off principal faster, you pay less interest.

Eggman says

If you pay your mortgage according to the terms that the bank gives you, you're as much a sucker as if you paid your credit card statement according to the terms the bank gives you.

Exactly.

10 year mortgage is extremely smart. Payments are high.

See if you let the builder handle the loan. It's very simple. If you knew how much a builder makes on a single home. You would understand quite well. Why it is well worth it to them. Builders make a KILLER MARK UP on every house they build.

Resale is no problem. I do it all the time. Or did, only a crazy person buys in a negative equity market.

See if the builder does the loan and the buyer defaults. He keeps the down payment and all payments. He puts another buyer in and has NO LENDER TO WORRY ABOUT.

Frankly if you knew how much a builder makes on a house in addtion to the vig you have to pay on your current loan. If you are in a new house. You could just get a little crazy. You saw my example on the previous page of 139 percent interest paid back IN ADDTION to the 100k principle. Just add about oh another 50 to 60 percent to that. Look its gouging, you sure as fuck can't get away with that. With like selling your used car to someone. No ones that fucking stupid. Deal is the book is there bluebook or whatever will rat you out. As for a new car used they could care less your hair would stand on end for the current markup. They have increased it to the ridiculous over the years. You don't know what it costs and how much is made on a new build. A liter of coke - 142 percent made costs about 3c a bottle to make unless on sale. So on there is huge markup in everything you buy. THESE PEOPLE ARE GOUGERS. Please understand that.

Those occupy people have a lot on the ball in my opinon. I hope they burn the fucking place down. Frankly whats been going on with things. Is no way to do commerce. If you ask me these occupy guys aren't political. They are just damn sick and tired of these slick talking swindlers running and thieving from many of the governments of the world and people.

So look up there the builder makes the loan at no interest and makes off really well. As for resale I can get into that with you later. Again in this current enviornment. With financing the way it is. DON'T BUY FOR ANY REASON. Unless you can get something at say 40% under last falls market. It's getting there folks.

duh...

that is why ARM is much better. Pay much less on interest.

if you can guarantee your job(to be able to refi) and you don't mind refinancing every few years or whenever you feel rates are in your favor, then ARM is for you.

if you like peace of mind, lock on a fixed interest, then you do the 30 year fixed.

ArtimusMaxtor says

If you ask me these occupy guys aren't political. They are just damn sick and tired of these slick talking swindlers running and thieving from many of the governments of the world and people.

You're damn right. I make an awesome income but have gone OWS. I support them 100% and have and will continue to help them out anyway I can. I am totally sick of the outrageous theft taking place in direct sunlight by wall street and both political parties. They are tear gassing and beating the shit out of OWS, even decorated veterans, but the REAL criminals are laughing out loud as they continue to steal and not ONE arrest of a government official or wall street person caught stealing. This is why I am pissed off and angry as hell. I am completely dumbfounded as to why very few are. Guess they have been TOTALLY brainwashed with little chance of us deprogrammers EVER getting through to them.

The bank isn't really worried if it makes more or less interest over the long term. In fact, if interest rates increase they would prefer that you just pay off the loan. They want the current rate now. You can refinance next month and pay off the loan or keep it for 30 years. It doesn't matter. In fact, the "bank" usually sells the loan so they don't make the interest anyway.

Everyone seems to be looking for some sort of conspiracy but there isn't one here.

Oh, and Artimus, builders have much smaller margins than you imagine. DR Horton (one of the largest builders) had gross margins of 16% last quarter. Their net profit was just over $35 million on $1.1 billion in sales or about 3%. That is $6,000 on a $200,000 house.

Buster Wall Street owns NYC. No point in saying the cops or even the government run things in any really meaningful way. The way these OWS wants them to. Because NYC government like the U.S. Government are in debt up to their necks. To the likes of Wall Street. It's nice to have young adults. That are sick and tired of the bullshit. I wish I was in NY I would be there myself. Buster the numbers speak for themselves. Deep down people may not realize. But have the sinking feeling they have been screwed. Your an intelligent person. With numbers like the ones ground out there. In my example above. You can see why some forecloused on person. Would be upset knowing or not. No less the fact they were told they were homeowners. To be thrown out only to realize they never owned shit. NOW THE FUCKING POLICE THROW THEIR TENTS IN THE GARBAGE. Fuck NYC government, Fuck Bloomberg. Fuck that property managment company thats included in most of the problem to begin with.

DaveM_Renter says

Let me try to explain the phenomenon in two simple sentences:
"The more you owe, the more you pay in interest. If you want to pay the same amount each month, you will have to pay mostly interest in the first years."

Good explanation.

On the other side of a mortgage is an investor in an annuity. The bank is just a middle man, taking a fee for creating this (an investment on one side/ loan on the other). They might hold it, as an investment, but aside from the up front fees, it's just a simple annuity, with a well defined ROI, and with what used to be risk commensurate with the interest rate.

If you can buy less than you can afford, and pay extra principle in the first 10 years, pay your mortgage early. This cuts your interest paid drastically and the time it takes to pay off the mortgage. It also cuts interest drastically to pay 1/2 the mortgage payment every two weeks. (Like 7 years) You can investigate these strategies by plugging extra payments into an amortization calculator.

Beware, however, some mortgage servicers have rules against these sorts of things. I had a mortgage through Regions some time ago. They would not apply any payment unless there was a full payment. They had a special program you had to pay them to make these partial payments for you. What a racket.

So in this way the only way to get ahead was to get one payment ahead/ make an extra payment instead of every two weeks 1/2 a payment.

If you try the pre-payment of principal strategy be sure to write on the check "apply to principal". Verify in your statement that it has been applied properly. Depending on the bank they will just hold the partial payment until they have a whole payment.

My boss has a loan serviced by Citi. The payment stub that comes with the statement each month has a space to itemize a partial payment of principal. Citi also has a special program where they will do two 1/2 payments every two weeks. Of course it costs a fee of $375. A hefty price for something you can do yourself.

Just remember in this environment, unless you have an adequate rainy day fund, even as much as a years living expenses in case of a job loss. You may not want to pursue principal pre-payment. The problem is if you run into trouble you most likely cannot get a loan to pull the equity out and on top of it if you can't make the mortgage you will lose your house. If you want to do a little to shorten the term do the one extra payemnt. It takes off about 7 years off the loan but it won't end up being that much money.

For short loans they charge simple interest. Like car loans. It is a much better deal, but this is because these are relatively short loans.

It's not so much deprogramming as much a debt slavery. A person with his OWN mind is more like the people of OWS. Many of them are young and really don't owe anyone. They are really dangerous to the lenders. Lenders operate off of PRINCIPLE. The principle being the lender is the slave to the borrower.

If a principle is in place. Like you should not kill or steal which are most of the major religions. (Assuming its a just peacetime and someone whacks someone else. Or steals their DVD player). See what I'm saying. Not stealing is a principle. FOUNDATIONAL. Like oh a CAPITOL. Or CAPITALISM. It has perminance. Like oh a temple it is foundational. Capital is a fucked word. Believe me. Might as well slam your head against the wall with that one. They know it.

It's like Israel being this big crapping religous monster that grew out of WW2. Usury is forbidden to Jews. Usury is at one end of fucking Jerusalem to the other. Condo's, commercial buildings, Auto Loans, Home Loans, Master Card, Visa. So the religous farce that has been foisted on us is total bullshit. Bet someone owns that government to. Guess who.

One more time Usuor's operate off of principle. IF that principle is foundational. Then they have a shitload of debt slaves. Not to mention at least several govts.

The fucking UK alone has government after government as part of its Commonwealth. Its fucking huge. With 53 member countries. A lenders dream. They did not join or become a part of it because they like London. Lending is involved. Ghandi saw those fuckers coming and got them the hell out of there. They did not want their resources raped through lending. Resources are very important to Indians as to be a part of their religion. Also they really are not into war and did not want to be pivoted into anything. I remember when they declared the U.S. China and Russia the only superpowers. UK was out. Im a really big fucking rube. The atomic bomb never did make a bit of sense to me. Used once. "It's all pretty much conventional now" -Red dawn. Fucking please I'll buy Zucatti park for a handfull of shit. Who the fuck are they kidding. But wait weren't they conquered? Those lil nippers learn fast don't they? Got little car to sell now. I got your little car right bettween my legs.

A Slave dosent really have a mind of his own. He just does what he is told. Has no rights. So I am not really suprised at some of the response here. They live in denial. They don't. They just don't have total control. So it's not deprogramming it's something more serious. I could take it less serious. However most major religions including Muslim and Jewish and Christianty condemn usury and consider it slavery. So I do take it seriously. I used to make hard money loans. I don't do that anymore. I saw how people sucked up to me to get those loans. Being my own cash. I watched their behavior when I tested that principle in the subject. It was sad to me. I got out of it. I don't like doing that to friends and neighbors.

If you want to live a day to day terror. Get a home loan tie the chains on yourself. Bow and scrape work live in terror every week. You just may loose everything you own very quickly. Not the end to be sure. However why not figure out something else. It's sad to see fearful people living from day to day.

ArtimusMaxtor says

If you want to live a day to day terror. Get a home loan tie the chains on yourself. Bow and scrape work live in terror every week. You just may loose everything you own very quickly. Not the end to be sure. However why not figure out something else. It's sad to see fearful people living from day to day.

Agreed. If you must buy, live below your means. You can pay it off and become debt free, just make sure there is no pre-payment penalty. Just make sure monthly rent would cover the note in case you have to move while trying to pay it off. Then you can rent it out and buy or rent where your new job is.

Not disagreeing at all Ms Anna. However I feel strongly in one direction. This one. People carp about being skilled and manufacturing jobs going overseas. The Mexicans etc. My thoughts would be to take some time to learn to build yourself. It's more than worth it.

Sheesh even learning how to run subcontractors. Why pay for with your labor for thirty years? A house that only took three months to build. Thats an average sized house. Just does not make sense. Live below your means is smart no doubt. The problem is this: If you get a loan or are in debt they are going to steer you to the things that are going to keep you in debt. Case in point. Why do people refinance? Dosen't make sense. True your saving. However what you are really doing is making it another 30 year note. The first 10 years start all over again. Most of it going to interest and not principle. I hear bla bla this and bla bla that. Truth is Ms. Nola. I get landlord credit reports. What really going on most people are usually stretched out way to far.

The greatest majority of people in this country are 3 bedroom owners by FAR. Thats whats here. True there were some newer type fancy builds that stretched that out and sunk the lenders.

Im respected in my field Ms. Nola. I appreciate your comments they make sense. That you for caring about others. What I am doing actually makes sense some don't get it however.

Why do people refinance? Dosen't make sense. True your saving. However what you are really doing is making it another 30 year note.
Most of the people on patnet who I hear about refinancing usually go to a shorter term (the conservative ones) or use refi proceeds as working capital at foreclosure auctions.

Artimus...

What is your field by the way? I am not entirely sure what your main point is. Is it being debt free?

100% agree on refinancing. Most of the time it is a waste of money. Putting that money toward principal will often be the same or better. You have to run the numbers though. This calculator lets you put in extra payments...it is very illustrative. It shows you month my month how much goes to principal and where in 30 year loan you really start paying down the note.

http://www.bankrate.com/calculators/mortgages/loan-calculator.aspx

I agree most people spend up to and past their income. This is why a house payment is a terrible idea for them in so many ways. For example your payment may fluctuate with your taxes and insurance payment. If people are already overextended, coming up with an addiitonal $200 to $500 for tax and insurance increases for escrow can be impossible. On the other hand if they are staying put, the forced saving aspect is beneficial because they will never have an asset otherwise.

I think we mostly agree. Debt is not a good thing for the most part. I am debt free and house free at the moment, but I have felt slave to a home in the past and I never want to do that again. Having said that, if I had kept that house I would be with rent parity right now. Divorce was the reason for the sale. Now my new fiancee and I are saving like mad renting. If we bought our apartment as a condo it would be over $300,000. We are renting it for roughly the cost of the taxes and insurance on that type of home/loan. We are in one of the nicest areas of Uptown New Orleans. Homes in this area are $500,000 to 3 million. We share our "house" with just the landlady and her husband.

Most people would have to take a loan to build their own house so I am not sure that is really an option to be debt free unless they do it like the Amish and get together as a community to build it. (A fantastic idea in my opinion.)

I would caution folks from being their own subcontractor without any prior experience or knowledge. I work in construction, it is the general contractor's job to coordinate all the work and do some quality control. Most people are not in a position to do this work without experience. I work for a structural engineer and people who want to be their own contractor is a red flag for us. We would not want to get involved in that type of project. Even with professionals you can have problems and get sued. Add in an inexperienced home owner and well there will be some sort of problem, just depends on what it will be and who is going to get blamed.

I know a guy who I used to work with me. He was his own general contractor to save money building his own single family home. Problem was, he didn't know what he didn't know. It was an utter disaster. It cost him more than he "saved" by being his own general contractor.

Another point that I think people should strongly consider when taking out a 30 year mortgage for a "new" house. There has been speculation that the newer construction may not even last for the 30 years of a conventional mortgage. If that ends up being true, this will cause lots of problems in the future. If the house is crap no-one is going to reimbuse you for your purchase in year 15 or 20. You will still have the payment, plus all the remediation to do.

My youngest sister almost bought one of these houses in Houston. It had water intrusion around the windows, it had structural defects in the roof. It had really strange plumbing sounds. It was ten years old. I told her to walk away from this property. Water intrusion means mold which means it could be a tear-down in the end.

The only... and I mean only reason she figured most of this out is she went with the inspector around the house and asked him about everything. Even though she had two little kids she took the time to do this and it probably saved her tons of time and money. The real estate (hack) agent was telling her it was no big deal. (of course) Don't trust the agent or anyone they recommend for inspections. Find your own and follow them around. They will lie to you to get you to buy the house. You are the only person you should trust.

A couple of people said that amortization works the same way with car loans as house loans. Actually it doesn't. Car loans are WORSE. You think the interest is front-loaded in a house loan? Take a look at the terms for car loans, much much worse. Use one of those mortgage calculators on your car loan and you'll find your principal won't line up with what the calculator tells you. That's because auto finance companies use different formulas.

AND THIS IS WHY THE AUTO FINANCE FOLKS INSISTED THEIR BUSINESS NOT BE REGULATED BY THE CONSUMER FINANCE AGENCY... because if they revealed what they were doing with loans people would get pissed off.

Watch out for the "Rule of 78s" method of interest calculation. It's the "sum of the year's digits" method. If you try to pay it off early, you're still on the hook for the pre-computed interest. Rule of 78s interest computation is illegal in loans over 61 months. Several states have outlawed this entirely and it's usually found in subprime markets.

My auto loan (got it because it was so cheap, why pay cash up front even though I had it) doesn't line up with the loan amortization results. It's really telling that the monthly statements refuse to break it into interest and principal; they don't want me knowing those numbers. I figure they're doing something hinky by front-loading my interest, but I don't know exactly WHAT. The numbers add up over the five years, but I suspect they're getting most of the interest over the first two. That's why buying a car and selling it quickly is a terrible move, and why you don't want your car totaled when it's relatively new.

madhaus says

Watch out for the "Rule of 78s" method of interest calculation. It's the "sum of the year's digits" method. If you try to pay it off early, you're still on the hook for the pre-computed interest. Rule of 78s interest computation is illegal in loans over 61 months. Several states have outlawed this entirely and it's usually found in subprime markets.
My auto loan (got it because it was so cheap, why pay cash up front even though I had it) doesn't line up with the loan amortization results.

My guess is that most of these loans are from the stealership itself, and not from banks, and as you said, it's more typical in subprime markets (and from subprime stealerships). Most car loans use normal amortization instead of the bizarre "finance charge" method, especially most of those that are from banksters or credit unions.

The Rule of 78s precalculates the amount of interest due as it would be under normal amortization and aggregates the total interest due into a "finance charge". Then you get a "rebate" if you pay the loan off early. So if you have a 48 month loan, and pay it off in 36 months, you'd get a 12 month interest rebate, but the rebate is calculated in such a way that you actually don't get back the right amount of interest as a normal loan. The "rebate" is actually a prepayment penalty if you do the math.

That's why you always need to read your loans carefully. If you see anything about an interest rebate or Rule of 78, caveat emptor. Generally a legitimate lender wouldn't use this method and would just calculate interest conventionally.

The Rule of 78s-type loans require you to pay a higher than stated rate of interest in the early months and a lower than stated rate of interest in the later months. You can see a calculator for this method here: http://www.hughchou.org/calc/rule78.cgi Ironically, this method is the exact opposite of what the OP was suggesting -- the OP was basically creating a Reverse Rule of 78s loan when calculating the total interest due under the loan according to normal amortization, but then rigging it so that early payments were half principal and half interest.

My loan is from Toyota's finance arm, not the dealership itself. I know how amortization works, and however they're calculating interest and principal on this loan, it isn't what the loan calculator says. So they're doing something hinky. The total amount of interest on the disclosure paperwork does add up properly, though.

madhaus says

My loan is from Toyota's finance arm, not the dealership itself.

Yes, when I'm saying "dealer financing," I'm really saying "dealer-arranged financing." The dealer generally has a list of preferred lenders, and usually the automaker's captive financing arm (i.e. Toyota Financial Services for Toyota) is at the top of the list when it's a new car stealership. When you buy a car with dealer-arranged financing, the finance company still has to approve the transaction. If they don't, the stealer will shop your loan to another preferred lender.

In addition, in some cases the stealership is adding on its own vig -- e.g. the finance company may offer the loan at 4%, but the stealer may mark this up to 6.5% (I believe California limits the vig to 2.5%, but don't quote me on that). In addition, the stealership gets commissions/fees for facilitating the financing. This is all negotiable. The stealership will often lie and say, "oh, you're Tier 2 credit," even if your credit score is Tier 0 or Tier 1 because they're trying to get a higher amount out of you -- this could easily make the rate go from something reasonable to something double-digit.

That's why most people are better off getting financing outside of a stealership, unless the stealership's offer is one of those flat 0-3%-type deals (although right now, many outside loans are 3% or less). If they're giving you 0%, take it, by all means. But always show up with pre-approved financing if they try to mess with you. Capital One, oddly, has a good auto finance program as do most credit unions.