posted on Jun, 11 2014 @ 12:39 AM
a reply to: Euphem
It was not until high school Algebra before I was shown how compound interest truly works. It works to rip you off.
Let's say you borrow $100,000 with a 5% interest rate to pay back over 20 years.. Conventional wisdom tell you 5% of $100,000 is $5,000. That is not
how compounded interest works, interest compounds on the amount owed, the longer it takes to pay off the loan, the more it accumulates. Using a basic
mortgage calculator I googled:
A $100,000 mortgage at 5% nets a $659.96 monthly payment over the next 240 months.
659.96 x 240 = $158,390.40, effectively a 58.39% interest rate.
At 30 years the payment is $536.82
536.82 x 360 = $193,255.20, effectively a 93% interest rate, almost twice as much as the original loan.
This figures to not account for insurance you are required to buy when you have a mortgage. It also does not account for property taxes the loan
holder is required to pay, despite the fact the bank owns the home and has the title.
That said, it can be cheaper to take out a mortgage than it is to rent. Despite home ownership being an investment that often results in a red ROI, it
is still better than 0 ROI. (return on investment) In other words getting 0.50 back on a dollar spent is better than nothing.