In 1934 the amortization of 15 and 30-year loans was created using a sliding ratio that changes over the life of the loan to figure the amount of principal and interest in each payment. This amortization is frontloaded for interest, meaning an average 70% to 85% of your mortgage payment is interest with the rest being applied to principal in the first years of your loan. As the loan matures more of your payment is calculated to go towards principal and the interest payment becomes less over time.
This is why borrowing $250,000 at 5% with a 30-year amortization, your first payment breaks down like this… your mortgage payment is $1342.05 with $1041.67 going to interest and $300.38 going towards paying down the principal. So at the end of one year you would have paid $3688.34 towards your principal and a whopping $12,416.26 paid in interest alone!
So putting it another way; out of the total $16,104.60 in mortgage payments for the year, 77% of that money was paid in interest to service the loan! That is called frontloading the interest. Here are some other interesting facts about frontloading interest:
- It will take 16 years 3 months for the sliding ratio to get to the point where you are paying more towards your principal than to interest out of your monthly payment. By this time you will have paid $171,603.80 in interest alone! Add to that principal payments of $90,095.86 you have a grand total paid out of $261,699.66 and you STILL have not reduced your principal balance by half with $159,904.14 left to pay on your mortgage!
- Speaking of paying off half the mortgage…that won’t happen until you reach payment month 242 of your mortgage amortization, that’s 20 years 2 months! Meaning because of frontloaded interest it takes 20 years and $199,675.34 in interest to payoff the first $125,000 of your principal balance. At month 242 in your amortization schedule, out of your hard earned money, you have contributed $125,100.76 towards principal and $199,676.34 towards interest. For a grand total of, to pay off HALF your mortgage, $324,776.10!
- Now it will take just 9 years 10 months to payoff the rest of your mortgage. That is if most people did it that way. The truth is 90% of all people who get a mortgage never get out of mortgage debt! Because every 5 to 7 years consumers are refinancing, or upgrading or downsizing their homes!
- Now because of the previous point we can now talk about effective interest rate! The loan we have used for our example in this article is $250,000.00 at 5%. The problem is the total interest cost. When a consumer closes on the loan the total interest cost for the life of this loan is revealed to them, it calculates out to be a staggering $233,138.00! By no stretch of the imagination is that 5%!…that is an effective interest payment or total interest paid as a percentage of principle of 93.255%!Lenders use a complicated amortization formula to determine how much interest you pay. P=L[c(1+c)n] / [(1+c)n-1].
- This formula turns your 5% loan into a 93.255% loan! On average, if you follow the lenders schedule, you will pay 75% more interest than you need to for your first loan. Now as we consider an unbroken string of refinances and the purchasing of new homes the consumer in this situation will pay about 500% interest on principal borrowed over their working life and even more is added on in retirement!
Here is a valuable rule of thumb, when a new bank product or service is introduced and marketed to save you time and money on your mortgage ask yourself this question; if I am saving money……who’s losing it? If your answer is the bank, think again!
If all this is true, why then are we celebrating the 80th anniversary of the 30-year mortgage?
Well, we here at the PILL Method Trust have discovered the secret to end this Financial Violence. Through education and the use of specialized technology (The P.I.L.L. Method Financial Robot) it is possible to cut your interest cost and the length of a 30-year mortgage significantly.
We are holding Mortgage Burning parties around the country to educate all consumers just how amortization really works and how to cut your interest costs by 75% and to pay off 30-year loans in an average of 10 to 12 years!
All this without refinancing, your payments stay the same and with no increase to your current budget! We will also show you how you can pay off all your debt, including student loans, auto loans and credit cards in the same 10 to 12 years!
We really believe these home parties will set the country ablaze with this knowledge that is taught nowhere else but here at the PILL Method Trust!
After these parties individuals will be able to answer such questions as:
◊ Why do lending institutions work so hard to refinance my loan every 5 to 7 years?
◊ Why should I NEVER put down a large down payment on my home?
◊ Why refinancing to a lower interest rate may make it Harder for me to pay off my mortgage?
◊ Why the answer to the question, “Should I get a 15-year mortgage or a 30-year mortgage?” is; Never purchase a 15-year Mortgage!
◊ Is it really possible to pay off my huge student loan debt in 5 to 7 years?
In 2014 we will be celebrating the advent of the 30-year amortized mortgage in 1934 with the most comprehensive and sweeping reforms in mortgage history through our Seminars and Home Parties. All of you can participate by hosting a Seminar or Mortgage Burning Party in your town via your church or service club or in your home for your friends and family members. They will thank you for your forward thinking and including them in your newfound prosperity.
Contact our office today to find out how you can participate in the biggest thing to happen to the Mortgage and Loan industry in 80 years!
Now what would an anniversary be without gifts? For everyone who organizes a Seminar or Mortgage Burning Party it is possible to receive up to $3500.00 or MORE in gift cash… Call today and learn how this can be YOU!
To contact the PILL Method Office: 256.886.1867
Copyright © 2010 by Donald Daniel
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