How Mortgages Work
What is a mortgage? It’s debt, basically, but it’s a special class of debt… debt that is backed by a home you live in. Almost nobody buys a home paying all cash for it. If you are plunking down that much green all at once, there is a good chance you’re connected to the mob. The typical home buyer – one with few dabblings in organized crime - might put down just a fourth of the total price in their own hard earned, over-taxed dollars to then take out a big fat loan to win the privilege of fixing their own dishwasher, mowing their own lawns and listening to their own attic creak with ghosts from days gone by.
What is “typical?” Eh. No such thing really, but if you and your first spouse (over half of America gets divorced these daze) put down $50,000 and borrowed $200,000 to buy a home for $250,000, that would be somewhere in the middle of the Bell Curve for starter homes in the U.S.
You’d pay “rent” on that $200,000 that you borrowed – if mortgage rates are 6%, that would be 12 grand a year in interest payments. And if the mortgage goes for 30 years, that’s 360 (30 years times 12 months a year) payments to pay off the $200,000 you borrowed, so in addition to the rent you pay on your principal, you pay:
$200,00 / 360 = $555 a month in principal pay down if you paid a flat number each month. In practice, it doesn’t really work that way, but that’s a cute little devil in the details we’ll get to in due time.