4 ms·

What I really don’t agree with regarding the payment structures is why mortgage companies are allowed to frontload the interest payments. Currently for the firs

What I really don’t agree with regarding the payment structures is why mortgage companies are allowed to frontload the interest payments. Currently for the first 5 years of a 30 year mortgage, you’re only paying the interest with no payment going towards the principal.

rzimmerman 4y ago
I don’t think I’ve ever seen a mortgage that’s interest-only for a fixed time like that (but I’m not sure - I’m in the US). If you want fixed payments for 30 years the only way that works is if you pay less principal at the start. There’s more outstanding debt with the same interest rate, so the interest is larger.
- CraigRo 4y ago
  They exist. I have a 10/1 io, at which point it becomes a 20 year amortization with a floating rate. The bet was that inflation would eat the principal down and I probably wouldn't be in the house more than 10-12 years anyway
  - rzimmerman 4y ago
    That's really interesting - so your payments are only fixed for 10 years (and at a lower amount, since it's interest-only)? I suppose you're betting that either: - You'll sell the house before 10 years - Rates will go down and you can refinance I'm in a more standard 10/1 ARM for similar reasons - the interest rate was lower and I felt it was a reasonable bet that we'd be able to refinance for a better rate (or worst case slightly worse rate) in the next 10 years.
    - CraigRo 3y ago
      Nope. I wanted maximum interest rate duration and I'm betting that inflation will be higher than my mortgage interest rate, so it will eat more of the outstanding balance. Adjusted for inflation, my balance will be less than half what it is now. I don't anticipate staying more than about 15 years, and the capped rate is low enough that in the worst case this is still reasonable, and I'll have greater optionality to refi if I have a bigger balance
refurb 4y ago
They arent “doing it”, that’s just how debt is amortized over a set period if you want fixed payments. Otherwise payments would be really large in the beginning and decrease over time as the remaining debt get smaller and smaller. If you want to pay more principle, either increase your down payment or get a shorter amortization period.
brigade 4y ago
Because you're borrowing less money as you repay the principal. Like, if you take a loan at 6% with monthly payments, that means each month you owe 0.5% of the current outstanding principal in interest. (6% / 12 months) Probably your question should be closer to "why is it so normal for loan terms to be stretched so long"
jjav 4y ago
> Currently for the first 5 years of a 30 year mortgage, you’re only paying the interest with no payment going towards the principal. Interest-only mortgages do exist, but that's highly atypical. On a normal (in the US) 30 year fixed mortgage you are never paying only interest. > What I really don’t agree with regarding the payment structures is why mortgage companies are allowed to frontload the interest payments. They are not! It might seem that way but it's simply the monthly interest on the amount owed. Obviously on month #1 you owe the most money, so you pay the most interest. Every subsequent month you owe a little bit less (since you paid off a bit of the principal last month) thus the same percentage of interest is now less.

rzimmerman 4y ago

I don’t think I’ve ever seen a mortgage that’s interest-only for a fixed time like that (but I’m not sure - I’m in the US). If you want fixed payments for 30 years the only way that works is if you pay less principal at the start. There’s more outstanding debt with the same interest rate, so the interest is larger.

CraigRo 4y ago
They exist. I have a 10/1 io, at which point it becomes a 20 year amortization with a floating rate. The bet was that inflation would eat the principal down and I probably wouldn't be in the house more than 10-12 years anyway
- rzimmerman 4y ago
  That's really interesting - so your payments are only fixed for 10 years (and at a lower amount, since it's interest-only)? I suppose you're betting that either: - You'll sell the house before 10 years - Rates will go down and you can refinance I'm in a more standard 10/1 ARM for similar reasons - the interest rate was lower and I felt it was a reasonable bet that we'd be able to refinance for a better rate (or worst case slightly worse rate) in the next 10 years.
  - CraigRo 3y ago
    Nope. I wanted maximum interest rate duration and I'm betting that inflation will be higher than my mortgage interest rate, so it will eat more of the outstanding balance. Adjusted for inflation, my balance will be less than half what it is now. I don't anticipate staying more than about 15 years, and the capped rate is low enough that in the worst case this is still reasonable, and I'll have greater optionality to refi if I have a bigger balance

refurb 4y ago

They arent “doing it”, that’s just how debt is amortized over a set period if you want fixed payments. Otherwise payments would be really large in the beginning and decrease over time as the remaining debt get smaller and smaller. If you want to pay more principle, either increase your down payment or get a shorter amortization period.

brigade 4y ago

Because you're borrowing less money as you repay the principal. Like, if you take a loan at 6% with monthly payments, that means each month you owe 0.5% of the current outstanding principal in interest. (6% / 12 months) Probably your question should be closer to "why is it so normal for loan terms to be stretched so long"

jjav 4y ago

> Currently for the first 5 years of a 30 year mortgage, you’re only paying the interest with no payment going towards the principal. Interest-only mortgages do exist, but that's highly atypical. On a normal (in the US) 30 year fixed mortgage you are never paying only interest. > What I really don’t agree with regarding the payment structures is why mortgage companies are allowed to frontload the interest payments. They are not! It might seem that way but it's simply the monthly interest on the amount owed. Obviously on month #1 you owe the most money, so you pay the most interest. Every subsequent month you owe a little bit less (since you paid off a bit of the principal last month) thus the same percentage of interest is now less.