Mortgages are great! They allow you to buy a home. However, what most people don’t understand is this: Mortgages are EXPENSIVE!
Here’s what a typical home mortgage looks like.
As you can see, a mortgage payment consists of (1) Principal and (2) Interest. This loan is amortized over 30 years so that all 30 payments are the same amount.
As you can see, you pay a lot more interest than principal for the first of this loan. In fact, each monthly payment is more interest than principal for most of this loan! These people would pay $568,861 in total payments for a $250,000 house.
Let’s look at the same loan from a different perspective.
As you can see, this loan pays more interest than principal for over 20 years. And what’s crazy, this loan pays over 85% interest for most of its first year, and it pays over 80% interest for the first 6 years.
Einstein said, “He who understands it, earns it. He who doesn’t, pays it.“
If we are paying over 80% interest on each payment, maybe we don’t exactly understand interest.
Mortgages are great. They allow us to buy a home. But not managed correctly, mortgages are EXPENSIVE!