Why do amortized mortgage loans have such high interest payments and such low principle paydown ?
raclawski04@ameritech.net asked:
Why do amortized mortgage loans have such high interest payment during the first few years? The seller is offering seller financing. Can I offer “straight line ” loan where say the principle and interest is 50/50?
Morgages are no different from any other loan in the way the amortize. They all amortize accourding to a bell curve. The only difference from this bell curve and any other bell curve is the time and amounts. Look at your credit card. Look at the minimum amount you need to pay. The amortization is nearly identical to a morgage. If you have $7000 on a credit card, the minimum amount due is about $140/month. That is 2% of the total balance. Now, if the card is charging 14% interest per year, then a little over 1% per month is pure interest. and you are actually paying under 1% towards the principle. If you pay only the minimum balance it will take about 40 years to pay off. If each payment is 1% of the total due, then you need 100 payments to pay the balance off. 100 payments is 100/12 years. Also, remember that the interest on a morgage is tax deductable as is the interest on a home equity loan/line of credit within certain limitations. This reduces the actual interest you are paying per month , since the government is paying you back for doing so in your tax deduction. All of this is reversed for bonds. A morgage is nothing more than a bond that the bank bought so you can buy your home.