Wow, this thread just goes to show we need more education on how money works in our school systems. I have no idea where to even start.
First let me say to the poster that said if your mortgage is sold to a new company they can change your rate to whatever they want---this is so wrong!
Your mortgage has terms that guarantee the interest rate, payback period, etc. Mortgages are sold all the time on the secondary market. The new
lender assumes the mortgage "as is" and cannot make changes to the terms of the contract.
To those who have talked about home appreciation, you are absolutely correct. Sure appreciation was improperly inflated in recent years and is
correcting in many parts of the country, but a home will increase in value over the years, assuming it is maintained. The home you buy today will
almost certainly be worth what you paid back over the 30 year term of your loan...or awful darn close.
Additionally, you get a mortgage interest deduction on your taxes.
And of course it will be that you paid back more than 6% in 30 years as total interest paid. Would you invest your money today knowing that in 30
years time you would only receive a total return of 6%? Of course not! But 6% per year would perhaps get you to invest. 6% compounded over 30 years
is of course more than 6% total...but it is still 6% PER YEAR.
The whole "front loading" concept is not exactly right either. You simply pay the rate on whatever balance you have each month. Based on a fixed
amortization loan your payments are calculated so you know how much per month you'd pay in equal installments to retire the debt in a specific amount
of time. If you make the equivalent of one extra monthly payment each year to principal reduction you can significantly reduce the number of years
of payments, because you are paying down principal. Go to an amortization calculator on the web and try it. Interest due changes every time you make
a payment, because it's based on the outstanding principal balance.
The amount you pay back is fully disclosed in a mortgage. You also get an amortization schedule showing how much of each payment goes to interest and
principal. If you don't like paying interest...don't buy a home. Pay rent instead. OOPS. You're still paying interest when you do that
also...you are paying the landlord's interest, so he can own the home free and clear while you and other renters have made all his payments for him.
Plus you get no tax deduction on your payments, you gain no equity and no home price appreciation.
Investing in a home is for most people a wise thing as long as they do not extend themselves too far to do it. Even very wealthy people keep a
mortgage on their home due to the tax deductions and low interest rates. They know how to get much more yield on their investments elsewhere.
Besides, home equity is very over-rated. The only way you can tap into this equity is to either sell your home or take a loan against it. If your
credit is bad or loan guidelines change you may not even be able to get to this equity that you "own". I ask you this: who is better off, the man
with $100,000 in cash and a $100,000 mortgage...or the man with no cash and no mortgage? Obviously you are better off investing your money and having
only minimal equity in your home...if you have to choose. Sure we'd all like to have tons of cash plus our home fully paid for, but for most that is
not possible, at least at a young age.
Sorry but there is no conspiracy here...just simple mathematical principles at work.
By the way...no one mentioned the fact that this compounding of interest works exactly the same when YOU invest money. If you invest wisely and start
at a young age you can have a significant nest egg on a very modest annual investment. Is that a conspiracy to make us all rich?
[edit on 18-5-2008 by Coach Knight]