BEWARE: What the Last Mortgage Payment Is Hiding

Most homebuyers find out soon enough that very little of their first year’s mortgage payments is applied to the amount they borrowed. But what they don’t know is how much their last payment costs them!

I’ll show you what I mean. On a $240,000 home, assume the buyers have good credit, have saved awhile to buy their home, and make a 20% down payment—the amount that used to be considered normal.

That leaves $200,000 to be financed. They find an attractive 6% interest rate and choose a conventional 30-year fixed mortgage. Their payments are $1200 a month ($1199.11, to be exact).

After about a month of settling into their new home, they receive their first mortgage statement. It shows one payment has already been deducted from their checking account, just as they’d agreed (for a 1/4% lower interest rate). The statement indicates $199.11 of their payment was applied to the mortgage principle. In other words, they’ve paid off a little less than $200 on their $200,000 loan—1/10^th of 1%. Five times that much–$1000–went toward the lender’s profit.

As sort of an upfront insurance, the lender reclaims most of the dollar amount of the loan as interest before applying much money to reducing the debt.

By the end of the first full year, as the couple is celebrating their anniversary in their home, they check to see how much their principal payback has increased as they’ve whittled away at the loan month after month. Their statement shows that the bank gratefully acknowledges their donation of $11,933 to its coffers. In addition, $2,456 has been credited to their loan. Not counting their down payment, they’ve purchased 1.2% of the home.

It’s at this point more experienced homebuyers will reassure the newbies that things will change. “It gets better from here on out. More and more of your payments will go to principal,” friends say.

Read why what their friends say about the mortgage getting better is wrong.  –>