Silent Second Mortgage

Finance Allah shmoop What are the components of a mortgage

payment All right so here's a weird thing about mortgages

When you borrow say four hundred grand buy a home

and say in a six percent fixed thirty year interest

you'll end up paying way more than the four hundred

grand just in interest Renting the money Think about it

Well you'll have a monthly pay payment of twenty four

hundred bucks and by the time you've made thirty times

twelve per year or three hundred sixty payments you'll have

paid some four hundred sixty three thousand dollars in interest

charges Seems like a lot of money to pay out

of your own pocket But since mortgage interest is usually

entirely tax deductible well the rial cost to most home

borrowers is actually meaningful E less than that six percent

interest maybe something closer to a three and a half

four percent something like that So while yes on a

total gross basis you will have paid out more than

the amount borrowed over the thirty year course in the

mortgage you'll also have been forgiven loads of taxes And

for what it's worth over most thirty year time periods

in history the market has gone up about eight to

ten percent a year on average Compound did something like

that So you feel the people mover floor moving fast

underfoot with inflation pushing things around as you go along

Well the money you borrow is the principal of the

loan and that number usually declines by a small amount

each month As you make a flat payment and it's

usually gradually paid off Check out what the principal of

four hundred grand looks like for the first twelve months

of payments right here Note that the flat monthly payment

is twenty four hundred dollars and see how the principal

payed as part of this payment loan thing there goes

from paydown of three hundred ninety eight dollars Teo Well

four hundred twenty a year later right Like you're paying

off principal little by little So you have less that's

attributed to interest And Mohr that's attributed to principal pay

down as you go along and note that this assumes

Ah flat monthly payment here Right You're paying the same

amount You're one you would You're thirty two thousand three

hundred ninety eight dollars and twenty cents on this particular

alone So after a year the amount owed an interest

is well just slightly last Here in this example it's

one thousand nine hundred seventy seven bucks down from in

a two grand and note what it looks like at

the end of each of the first five years That's

a big shift from almost entirely interest do now Principal

being ah meaningful part of it you got after ten

years right here and then at the halfway point in

fifteen years it's here So I noticed that the amount

owed at this point is roughly half the total Why

Because the lion share the pay down went to interest

in the first half of the life of the mortgage

AII those first fifteen years and well then in the

back half way more will be attributed to a principal

pay down than to interest Like check out what the

very last month's payment looks like It's just twelve dollars

of interest and two thousand three hundred eighty six dollars

of principle All of this is principal until well then

the balance is zero and we'll finally Then you will

have fully paid off your mortgage and own your home