You still don't get the most fundamental concept of finance: the time value of money. Money has a cost. Its like you are renting money. the "rent" on 120,000 at 6% interest = (6% /12)* 120,000 = $600 / month. that is not arbitrary. Its the monthly cost on the money you loaned. You can pay as much byond that as you like to pay down the principal.
You can pay back as much principal as you want AFTER you pay the "rent (aka interest)due on the loan each month. If you want to pay the principal down -- and reduce subsequent interest payments, pay 2600 each month. $600 which you owe for renting $120,000 and 2000 principal pay down. After a year of doing that, you would have 96,000 principal due, and your interest would fall to .5% x 96,000 = $480. Study the spreadsheet a little. Look at column D and how the interst is calculated each month. its 6%/12 * the remaning principal each month. There is NOTHING arbitrary about this arrangment. If you want your loan structured so that interest and principal are equal, then (for a 30 year loan) you would have an interst deficit each month. Just like past rent due, you eventually have to pay it. How is that done? The unpaid interest is added to your principal. So you reduce interest by say $400 each mnth by paying equal principal and you now owe $400 in past interest due. That will be added to your principal. You ahve gained nothing except some extra paper work. If you don't like how banks structure their loans, if you really feel its a rip off -- why be ripped off (even ifs only all in your mind). Why not just rent? You either rent property, or you rent money to buy property. And in the first case, your landlord rents the money for the property. And part of your rent is paying him back for his rent on the money to buy the house you rent. > have been arranged so the principle so that both could be paid > together over the 30 years by simply adding the principle and > interest together and dividing the amount over 30 years. > This is an arbitrary arrangement by the banks. The interest could > have been arranged so the principle so that both could be paid > together over the 30 years by simply adding the principle and > interest together and dividing the amount over 30 years. --- In FairfieldLife@yahoogroups.com, "suziezuzie" <[EMAIL PROTECTED]> wrote: > > --- In FairfieldLife@yahoogroups.com, new.morning <no_reply@> > > > > Here is the Excel file > > > > > The banks are not front-loading interest. They are charging > interest > > > > > on a "pay-as-you-go" basis. That is, they are charging > interest on > > > > the > > > > > outstanding principal. No more, no less. As the principal > declines, > > > > so > > > > > does the interest on the remaining principal. > > > > > > > > This is true for short term loans only, not 30 year fixed > loans. > > > > > > Not true. The principle is the same. If you have a teaser low > interest > > > loan for the first 5 years, or an ARM, or other more complex loan, > > > then its a slightly different structure -- but the principle is > the > > > same -- you pay interest on the outstanding principal. > > > > > > You and the author of the link you gave appear to feel that > because > > > initial interest payments are more than principal in the first > years > > > of the mortgage, that it is "front loaded". Thats an odd > definition of > > > front-loaded. Front loaded traditionally means paying MORE interst > > > than is warranted by what is due on remaining principal. > > > > > > Create a payment and interest stream in Excel or Google SS and you > > > will understand whats going on. > > > > > > I have put an excel ss that mimics your case in the FFL files > > > "Service". Actual interest does not sink to the level of principal > > > until year 21. But that is NOT front loading in the traditional > > > finance sense of the word. > > > > > I never heard the term front loaded before so I thought you were > using it to mean what we're talking about, that the interest on a 30 > year fixed home loan is calculated by the banks on purpose to be paid > at the beginning of the loan as you've shown on your excel sheet. > This is an arbitrary arrangement by the banks. The interest could > have been arranged so the principle so that both could be paid > together over the 30 years by simply adding the principle and > interest together and dividing the amount over 30 years. The reason > the banks do this, is to collect the interest first. That way, if the > borrower should decide to pay off the entire loan early, let's say > after 10 years, they will end up paying almost the entire amount of > principle. Look at your excel sheet and you'll see that after 10 > years, the accumulative interest is over $60,000 and the accumulative > principle is only $17,000. The pay off would be around $100,000. > > This is what I'm talking about, banks purposely collecting almost all > of the interest up front. In my opinion, this is a scam. > > Mark >
