patrick.net

Hi folks,

The topic is on mortgage loan amortization.

Although I am a homeowner and have plenty of experience with amortization of loans (I've just accepted that this is how the system works as have most people), I cannot shake the underlying feeling that soemthing is wrong here and the average person really gets the short end of the stick.

Given that the see-saw heavily favors the interest portion of the loan payment during the first 10yrs or so of the typical 30yr mortgage, the owner of the property is not only getting the short end of the stick by applying very little principle to the property during that time, but given that the average person owns their home only 5-7yrs, they are giving back nearly the entire loan amount after that short 5-7 year period... Of course there have been windows in time where property owners have gained a great deal of equity during a 5-7yr period, but in most 5-7yr periods of real estate history, any equity gained during that time is peanuts compared to the interest that was dished out during the same period.

Anyone know the history on loan amortization and when it became a generally accepted practice in real estate?

In the table below, 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

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 ?!

#housing