This is highway robbery!!!

Discussion in 'Credit Talk' started by SoParkDiva, Sep 9, 2003.

  1. SoParkDiva

    SoParkDiva Well-Known Member


    • On a 30-year, $150,000 mortgage with a fixed interest rate of 7.5 percent, a homeowner who keeps the loan for the full term will pay $227,575.83 in interest.

    Huh?!! This means the homeowner is paying $377,575.83 for a $150,000 loan!!! That's worse than loan shark rates! I can't believe this is legal.
  2. faztcobra

    faztcobra Well-Known Member

    Am I missing something or should that be $377,575.83?

    Where'd you come up with the extra $50K?
  3. SoParkDiva

    SoParkDiva Well-Known Member

    Re: Re: This is highway robbery!!!

    You're right I transposed the 277 with 227. It's still a shock.
  4. rhondak

    rhondak Well-Known Member

    Re: Re: This is highway robbery!!!

    There's a very easy way to cut that down. Make an extra principle only payment each month. Two if you can.

    In those early years of a mortgage, you are paying almost all interest and very little principle. You may have only $60 or so going to the principle, so pay an extra $60 or $120 that goes directly to the principle each month and the life of the loan is cut in half and the amount of interest, less than half.

    If you have Excel, do an amortization schedule and plug in the extra principle payments and you can see the interest paid go down dramatically.
  5. SoParkDiva

    SoParkDiva Well-Known Member

    Re: Re: Re: This is highway robbery!!!

    That's good advice but what if the bank gets confused and doesn't apply the "extra principle" to your current payment and instead thinks you have short paid your next month's payment? I have read of that happening on this very board.
  6. Flyingifr

    Flyingifr Well-Known Member

    It's called COMPOUND INTEREST, and over long periods of time, its results can be rather astounding.

    If Jesus Christ's parents had borrowed $1 when Christ was born at just 1% interest per year, His heirs would now owe $452,597,016.
  7. rhondak

    rhondak Well-Known Member

    Re: Re: Re: This is highway robbery!!!

    It happens. Happened to my dad. He did that his whole life.

    First, always use a separate check for the extra principle and clearly mark it "principle only"

    Second, keep track on an amortization schedule yourself and compare it to the bank periodically. Like at the end of every tax year when you add up your interest expense anyway.
  8. rhondak

    rhondak Well-Known Member

    Re: Re: Re: This is highway robbery!!!

    In my dad's case, not only was he making extra principle payments, he was also paying earlier every time until he got way ahead on the regular payments.

    At one point they tried to hit him with a late charge - but he was almost a month early. He had to take his amortization schedule and payment history to the bank to straighten it out, but it did get straightened out.

    Then the bank, in their overanxiousness to correct the problem, accidentally credited him with a payment he DIDN'T make.

    Being the good person he way, he tried to tell them but they didn't understand and he finally gave up trying to give them their money back.
  9. faztcobra

    faztcobra Well-Known Member

    I just closed on a house 2 weeks ago. and yeah, looking at the amortization schedule was downright scary for me. Seeing only $130 going to principle and $690 going to interest just floored me. I'm gonna do everything in my power to pay an extra $100 to principle every time I make a payment(equates to an extra payment a year) + make 1 extra payment per year. I hope to be able to cut my loan in half. Probably won't stay here 15 years, but at least it'll help me build equity for my next home.
  10. Hedwig

    Hedwig Well-Known Member

    What you don't realize is that putting the money away (over the long haul, the stock market averages 10% or so) will increase your wealth more than those extra payments. First of all, the return is higher. Second, the compounding feature is working for you. Read Bruce's thread on the Rule of 72.

    Besides that, the interest on your mortgage is tax deductible. So, say your rate on your mortgage is 6% and your tax bracket is 33%. Your effective interest rate is 4%. If you're making more than 4%, especially if you can get it in a tax deferred account, you're building wealth. The interest you earn is more than the interest you pay.

    Yes, the numbers look big. But put them in a spreadsheet where you pay yourself that $100 or so extra, run it at 8-10%, and see where the power of compound interest works in YOUR favor.

    You also have the money available to make those payments if you get injured or lose your job. The fact that you've paid extra on the loan won't help you make payments. The money that is invested will.

    You wouldn't consider it highway robbery if your $130K ended up being $400 or more in YOUR pocket, would you?
  11. RichC

    RichC Well-Known Member

    "What you don't realize is that putting the money away (over the long haul, the stock market averages 10% or so)."

    Well if I were guaranteed 10%, sure that would be great. I know too many people who have these great 401Ks or stock portfolios who thought they would be retiring soon, and instead, they'll be working quite a lot more years.

    What if you don't make 10%? What if you lose money? What if the stress of dealing with stock brokers or the market drives you bonkers?

    At least putting the money into equity on your home is much more risk free. Yes, if you have a devastating problem you may have to sell your home and move to one cheaper. But you'll have the equity to do that.

    For me, risk is bad. I've seen too much of what has happened to people who 'thought' the market would guarantee them 10% and are now trying just to survive due to all of the losses to their portfolios.

    Thanks, but no thanks.

    But your points are well taken for individuals who want to go that route. What you said is accurate, just not for everyone.
  12. rhondak

    rhondak Well-Known Member

    First, let me say congrats on the new house!

    The way I look at it, $100/month is only $25 a week. I spend more than that on rum and cokes!
  13. rhondak

    rhondak Well-Known Member

    Hedwig, you are right about that, but I think it is one of those personal decisions regarding risk and debt level and long term goals. For me, having the debt gone sooner and not having to make the payment is more important. For me the freedom of not having to make a rent or mortgage payment at all is VERY appealing.

    And of course, you could do a little of both to sort of not have all your eggs in one basket. Say pay some extra on principle AND pay some into some sort of savings.

    Most people are not that disciplined, though.
  14. Hedwig

    Hedwig Well-Known Member

    Note that I said OVER THE LONG HAUL. Yes, a lot of people got greedy and lost a lot. But, if you maintain a balanced portfolio for 15-20 years or more, you can't show me one case since the depression where the average hasn't been this.

    I'm not talking about retiring in 3 or 4 years. If you're planning that, you should have made your money in equities and moved on to a more conservative position.

    You're not going to get the big compounding effects unless you assume risk when you're young. I didn't, and I'm paying for it.

    People who don't buy now while prices are down are like the people who go into the store, see the half price sale, and say "No, I think I'll wait until the price goes up to buy that."
  15. rhondak

    rhondak Well-Known Member


    You said a lot better sort of where I was coming from. I've seen too many people that really thought their investments would be there for them down the road and it just didn't work out that way.

    I don't know anything you can get a guaranteed 10% on. And equity in your own home seems so much safer to me too.

    I just can't take the risks anymore (too many layoffs for me) I never had a problem getting a job until sept 2001 - 2 weeks after, my first layoff. That one lasted 6 months and destroyed my very, very good credit. Found another job that lasted a whole 9 months before I was laid off again. My credit is completely destroyed which is why I'm working on my fiance's instead on mine.

    He doesn't have the older good stuff that I do, but he also doesn't have nearly as much bad stuff as I do and now, I don't have any income (which is ok - he supports me, but my income/credit can't contribute to a mortgage decision now anyway)

    I started my own business - it's very slow going. I don't plan on ever going to work for another company again.

    sorry to babble I guess this is just my state of mind about paying off debts and not acquiring any new debts - having a home that's paid off as soon as possible seems a better prospect to me than having some savings to make the payments with for a little while. Once I own that home outright no one can ever take it away from me, no matter how long I don't work. (other than taxes of course). If everthing goes well, no injuries, etc., I won't have to work very hard to pay my monthly bills and can spend a lot more time playing.

    If something does go wrong, at least I know I'll always have a place to live.
  16. rhondak

    rhondak Well-Known Member

    People who don't buy now while prices are down are like the people who go into the store, see the half price sale, and say "No, I think I'll wait until the price goes up to buy that."

    This is true, but a lot of people don't make the money they used to. I've gone from $100K/yr to basically nothing in very short order. The reason those prices are as low as they are is partly because less people have the disposable income to buy them and they are a riskier investment.

    And as you said, it depends on your age and how long you can leave the money alone. Some of us can't leave it alone for 20 years (I'm thinking of my mom - who took all her investments out when things started going south - I know the opposite of what you're supposed to do, but she may not have that many years to wait for things to get better)

    BUT I also think that using your half-price scenario, that this absolutely the best time to buy a house (or any property) and lock in low interest rates.

    (Again, using my mom as example, she sold the property she and my dad had and bought outright, a smaller property in town. She never has to worry about having a place to live for the rest of her life. That has to be comforting to her - it would be to me)

    I used to have 401K, stocks, savings bonds, etc. They basically all got used up during the layoffs. Yeah, they helped me get by for a few months, but what after those few months? nothing.
  17. Hedwig

    Hedwig Well-Known Member

    So, you own a home and have no income. How do you get the money you need to live? And how do you make the repairs that it's going to need?

    And, as I said before, you have to work with a GOOD Financial Planner, and 5-10 years before retirement you would be moving to a more conservative position. Then the money you plan to use to retire hasn't "gone south"--it's still there, waiting. I know personally two people who have retired EARLIER than they planned to (within the last few years) because they followed this plan. They took their compounding up front, then could retreat to a "safer" place.

    And there's no guarantee that the house value will hold, either.

    If you had been following my plan, you would have had the funds to fall back on during the times of unemployment. That's the point. You can't get it out of the house then, but you can get it out of your investments.
  18. Hedwig

    Hedwig Well-Known Member

    Sorry, hit submit twice by mistake.
  19. SoParkDiva

    SoParkDiva Well-Known Member

    You have a point Hedwig. But still I would rather put that extra change into my equity if it will save interest and shorten my mortgage term in the long run.
  20. Hedwig

    Hedwig Well-Known Member

    If you're more concerned with debt numbers than with building wealth, be my guest.

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