The strange title of this column hopefully will help you to understand the concept of different loans to solve different situations that arise in the mortgage industry. For years borrowers assumed that a mortgage was to finance a home purchase and it didn't matter what type of loan they took. It is now fairly evident that a mortgage loan is a terrific financial planning tool and, in most cases the bedrock of the borrowers financial well being.
I am going to take various loans and build a chart to demonstrate how mortgage loans work ,and more specifically how the payment is distributed between principal and interest. The more that goes to the principal the lower the balance and the greater the equity in the house.
Monthly Payment Principal Interest
30 year fixed 6.25% $1,847 $ 285 $1,562
20 year fixed 6.125% $2,171 $ 640 $ 1,531
15 year fixed 5.875% $2,511 $1,042 $ 1,489
The biggest surprise to borrowers when looking at a chart, as the one above, is interest paid is greatest on the longer loans. This is because the interest rate is higher and actually has nothing to do with the amortization. What they should be surprised at is the amount of the payment going to the principal, not the interest, as the amortization gets shorter. I have been told by many borrowers they didn't want to be "house poor" by taking a 15 year loan over a 30 year loan. In reality it is just the opposite
Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom.