If you already know that at 6%, a 30 year mortgage costs you 115%, not 6%, you're way ahead of most people. Here's an explanation of exactly how mortgage interest compounding works, and why it costs you so much. By the way, if you see this as the biggest mortgage fraud or bank fraud of all time, you won't be alone. That's why you want to join the Great Mortgage Revolt (no cost or obligation, of course) so you can keep up on these scams respected institutions perpetrate in our midst.

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You're probably aware, especially if you are a homeowner, that the first payment you make on your lovely new dwelling is mostly interest. On a $200,000 mortgage at 6% per year, the first payment of $1199.10 you send in includes exactly $1000 in interest. That means only $199.10 is applied to your actual ownership of the house. The $1000 is totally the lender's take for fronting you 200 grand for a few years.

Homeowners are generally much more excited about their last house payment than their first, because most of the last payment goes to principal. "Ah, finally, a payment that goes almost entirely to principal." In our $200,000 example, payment number 359 (of the 360 in a 30 year mortgage) includes only $11.90 interest! In other words, a full $1193.14 goes to principal. The following month, there's nothing to pay except the $5.97 interest for the prior month. This gets lots of homebuyers excited, but don't celebrate too soon. There's something very wrong with this perception.

Where Mortgage Interest Goes Wrong

This may come as a surprise to you, but your last payment might be your most expensive of all. Why? Because you pay interest on that $1193.14 three hundred fifty-nine times. The very first payment you make includes $5.97 interest on the last payment you will ever make. Since the last payment amount doesn't change, the second mortgage payment you make also includes $5.97 interest on $1193.14. That continues month after month until in the first year alone, you pay $71.59 interest on the very last payment you will make, 29 years later.

The same process occurs the second year. You pay $5.97 each month toward the interest for holding that last payment out so long. This amounts to $71.29 a year for 29.9 years.

In all, you pay $2141.69 interest on that last payment–over the years, mind you. That's nearly 180%. If all of that were to be paid at once, the last payment would cost you $3334.83. If that's not reason enough to pay off your home as soon as possible, I don't know what is!

Other Benefits

In addition to saving money, paying your home off earlier can provide real security, not just the "sense of security" people talk about. Owning your home free and clear means that if a family member has health challenges or you prefer to spend $1000 a month on travel, you're free to do that. You can take a pretty nice vacation on the $14,000 a year you used to spend on house payments! If you invest $14,000 a year in something with only a 7% yield, you'll earn $1000 that first year. If your yield is 10%, which is more generally accepted as possible, and you compound it, for a mere five years, you'll accumulate nearly $180,000.

If in six years you could invest a house payment for a 10% return and accumulate far more than the $200,000 you borrowed in the first place, you could really beat the banks at their own game!