Speaking as a former degreed professional in the financial industry, a veteran of 30-odd years in various capacities (mortgage, systems, training, and so on), I have to say there is so much good information here, from various correspondents, that this is a page definitely worth bookmarking. Just some random thoughts, based on various posts in this thread:
Yes, principal payments (and I'm sorry, but the spelling here is principal) made over and above the amount of the mortgage payment, can make quite a difference. I always told my clients, the more extra principal ("curtailment") you can pay every month, the more consistent you can be with it, and the earlier you get started, the better. It does not necessarily have to be every month. Put your tax refund towards principal curtailment every year. There are any numbers of tools online, that can show you the advantage of it. Even if you pay $20 extra per month, that's $20 more equity in your home than you would otherwise have.
Mortgage finance and investment looks something like this: the major governmental investors (FNMA, FHLMC, GNMA), as well as many private ones (most mega-banks do this as well), provide money, "priming the pump", if you will, to allow lenders to lend. The mortgage is made, and when borrowers make their payments, both principal and interest (most of the latter, anyway, more on that in a moment) goes to the investor. The investor --- who is only a conduit for funds distribution --- then disburses it to the mortgage-backed securities holders, who can be other banks, investment houses, or even individuals. The mortgage servicer (the entity that processes the payment, ensures that taxes and insurance are paid, collects from delinquent borrowers, and so on) takes a small percentage of the interest --- think of the "vig" (vigorish) in gambling --- and keeps it, paying salaries for the bank employees, other corporate expenses of doing business, and keeping the rest as profit. Let's say you pay 5 percent interest. The investor receives, in most cases, 4.75 percent --- that is the return on investment for the security holders --- and the servicer keeps .25 percent. It adds up. A good servicing operation can be the "cash cow" for the entire firm. So it is not quite as sinister as it might seem at first blush. To make a long story short, entities that have invested in mortgages get a return every month, including the principal as it amortizes down.
I had never thought of "inflation-based" mortgages, i.e., as long as your rate is lower than the rate of inflation, you're actually "making" money, so to speak. Good concept.
Yes, until you've paid some serious principal --- and that can take a while --- you're basically renting your house. However, you have something to show for it, a little equity in your home is better than none, and towards the end, you're paying almost all in principal, "amortization" being literally "killing" of the loan (think of the French root mort --- "dead"). If you rent without owning, at end of 30 years, you have, drum roll please... 360 cancelled checks. Nothing more.
Traditionally, lenders made mortgages based upon the "28/36" rule --- your mortgage payment should be no more than 28 percent of your total gross income, and all of your debts combined, including that mortgage, should be no more than 36 percent. Then, in the early 2000s, the various investors decided that borrowers could sustain more debt than that. Bad mistake. A lot of people got easy credit for houses they couldn't afford, and presto, many people lost their homes.
If you have to take out a mortgage, find something affordable, less than what you can afford, make your payments, pay as much extra principal as you can, and get the whole mess over with as soon as you can.
Topic: Mortgage interest will destroy you (Read 5191 times)