30 year amortization is now obsolete!
September 19, 2007 | Mortgage Acceleration | 
2 comments
If you are a homeowner you have definitely experienced a time where you opened the current months mortgage statement and noticed how little of your hard earned money went towards principal. It is a hard reality that we all have faced. Why is this?
The problem is the 30 year amortization schedule combined with the closed end feature of a mortgage. The payment is fixed for the full 30 years which is what makes us feel secure but in reality, that security is a smoke screen.
Think about it, do you know anyone that has ever paid a 30 year mortgage off? The days where people keep a home through 5 generations are over. In the past 20 years the introduction of multiple short term loan products such as ARM’s opened the door for the recycling of customers. The short term products meant customers would be refinancing again, and again.
As a result, the average American keeps a home loan 5 - 7 years. This is not a coincidence. This is long term banking strategies that have played out on the American public over years resulting in Americans saving very little and taking much longer to pay off debt than places like Australia and the UK where the average home is paid off in about 13 years. Why? Simple…they do not use the 30 year amortized fixed rate product as their main stream product.
If you examine a 30 year amortization schedule you will find in month 1 your loan payment will be split @ 85% interest - 15% principal. Yet even after 7 years we are still paying 78% interest - 22% principal each month. This is when we normally need to refi or buy a new home for a larger family yet we are making very little impact on principal reduction. It is not until apx month 230 that we reach a point of 50% interest - 50% principal….that’s almost 20 years! The sad part is at this 230 month mark we still owe apx 60% of the original loan balance! Imagine still owing 60% on your home loan AFTER paying on it for 20 years. If you are in a 30 year fixed that is what you are setup to do.
The banks win big but we lose. The moral of the story is get out of the 30 year fixed rate mentality and look into the Home Ownership Accelerator. This is nothing new for the UK and Australia but the US banks have kept it from us to make a hefty profit. Now you have a choice.
Check this out for more info: NewFoundEquity
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What about if you want to take a 30-50 year mortgage with the intent of reselling a new-built house within the same year? I have heard that the penalties and interest accrued are still manageable when considering such low monthly payments. Especially if you can flip the house quickly. This is in Canada, though-might be a little different than our neighbors to the south?