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  • The Best Keep Secret-How Mortgage Interest Really Works!

    1 posts, 1 voices, 538 views, started Jun 10, 2009

    Posted on Wednesday, June 10, 2009 by Cynthia Cavoto

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    • Aquamarine
      Offline

      We need to understand how mortgage interest really works in order to make our money for us.   While we all need to have a mortgage, if we really understood how mortgage interest is accrued we may look at this debt and the buy down of the mortgage much differently.  I thought I was a relatively "informed" person but when it comes to mortgages I was in the dark as so many of us are - in fact so are mortgage professionals, having talked with many of them about this subject....

      The most highy promoted and selected mortgage is the traditional 30 year fixed rate of mortgage.  Actually the 30 year fixed is really an adjustable rate mortgage and the rate we are paying is really highlyer than we can ever imagine, completely blocking the path to financial freedom.    

      Consider these facts:

      Assumption, a $150,000 mortgage with a 6% interest rate for 30 years.  Some interesting facts:  

      It takes 19 years before just HALF of the monthly payment goes to Principal
      After 7 years, the consumer has paid $75,600, but only $15,541 goes to Principal.
      After 10 years, over 84% of the starting balance is owed.
      After 15 years, over 71% of the starting balance is still owed. At this point, the consumer has paid $161,000 in payments, more than the original starting balance.
      The correct formula for mortgages is Effective Rate.  So what happens when we evaluate this same mortgage applying the Effective Rate.  (the accurate financial evaluator) For the finance people, here is the formula using a financial calculator.

      PV -    equity built in given time period
      N = nunber of years being analyzed
      PMT = monthly paymet (as a negative sum)
      Using the same assumption of mortgage and term, lets see what really occurs in interest rates - a few eye popping facts!

      If our sample 6% loan is kept for 25 years, the consumer would wind up paying almost $270K over 25 years for $104K in loan equity.  Entered into our formula, the actual rate is 9.43%.  That is right, 9.43% not 6.0%.

      It gets much worse from here...

      How much would the real rate be if that same loan was kept for 20 years?  The answer is 14.82%.  A 15 year term, would be 24.16% interest rate.  

      The average homeowner (until the recent economic downturn was 7 years)..... I will omit that effective interest rate out of this writing and let my readers compute....

      Lets pay down our mortgages - it should be a high priority!!



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