Zero-Coupon Mortgage
You pay nothing. Until you pay it all.
Sounds like the tag line to a testosterone-y mobster flick, right? Well...it's not.
You take out, say, $300,000 in a mortgage at 5% interest. You owe literally nothing along the way on principal, no payments on interest, not even heartfelt love to the bank for affording you this lovely new home.
The catch? Not only is the principal due in 15 years, but the interest on it, compounded, is due at the end as well. So you'll owe the bank a check for something in the neighborhood of $700,000 at the end, all in one swell foop. Or you can hand them over the keys to the home as you move out.
Sounds risky for the lender, right? They don't like repo-ing homes. So then what do they do? They charge you a much higher rate of interest than they would a normal "conforming" mortgage taker who pays down a tiny bit of the principal each month so that there isn't a big fat smoking hole in the ground at the end.
Related or Semi-related Video
Finance: What is a zero coupon bond?15 Views
Finance allah shmoop What is a zero coupon bond After
all this time our hero remains zero Yeah dude all
right well there was a whole song about him and
your parentsgeneration Just ask him The coupon on a bond
is its dividend or yield payment also known as the
rent paid by the corporation or government or individual who's
Borrowing that money sofa bond has zero coupon Does that
mean the rental of that capital is free Uh no
not at all Isiro coupon bond with par value of
a thousand might sell initially for say seven hundred twenty
dollars iy a big discount to that grand the bonds
interest is on ly paid cumulatively at the very end
when the person who loaned the seven hundred twenty dollars
gets his grand back that's it it's a one time
payment of a thousand bucks so many years later like
a decade of that bond yielding a bit over three
point three percent if you did the math of compounding
well this is what it would look like Note that
the amount owed at the end of the year is
mohr than what was owed the previous year and that
the interest is charged than on that amount Well in
real life these calculations are done twice a year with
bonds that is every six months the interest rates are
charged Zero coupon bonds yield notably more than normal bonds
which pay interests every six months Why Why With zero
coupon bonds yield mohr risk in paying some interest at
least some each six month period Well the bondholders getting
something back along the way and over time the interest
payments can be More than the principal loaned itself So
with zero coupon bonds Well there's Just a one time
payment at the very end So you'd better hope the
person showing you that money doesn't You know just decide
to skip town a week before the principal and interest
combined Or do speaking of which i've got a flight 00:02:00.288 --> [endTime] to catch No
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