alright, i’ve been trying to save and buy a home for years now. might be able to do it this year but im having an incredibly hard time understanding the moving parts of a home loan. excluding everything but the principal and interest on a loan, how does a 7%APR on a loan of $300k end up making you pay like $750k over the course of 30 years ??? i also saw that home loans are front loaded for the interest first…. 7% of 300k is 21k but people talk about paying interest for the first 2-3 years of their mortgage… im not totally understanding how the interest is factored into the monthly payment.
In: Economics
Other commenters are explaining the amortization schedule which is important to understand. Here’s another perspective: the bank does you a favor by lending you a massive amount of money at once, and there’s risk in doing that because they don’t know if you’ll be able to pay down the whole loan/mortgage fully. This was all willy nilly before 2008 when they basically gave everyone who could breathe a mortgage loan, but now there are strict requirements for a mortgage approval, so banks can be more secure now trusting that a homeowner will actually pay down the loan.
A mortgage loan is massive. If you went to a bank to ask for a personal loan, depending on your income, they’d give you 5-10k at best without collateral. They will ask you what you’re going to spend it on, but because they don’t know for sure, you could abuse their money and never return it, which is why personal loans are much lower than mortgages.
However, with housing, people NEED it. So banks are more willing to give you a large loan to purchase a home because they know it’s a necessity and you will pay it because you want to stay sheltered. That’s why mortgage loans are safer and can be in much bigger sums than a personal loan.
But, the bank is still taking a risk lending you THAT much money. Let’s say it’s a 400k house and you paid 20% down, 80k. They’re still giving you a loan for 320k, which is HUGE for a single person or family. And so, they must make sure that they get paid first, which is why the amortization schedule is structured such that you pay the bank for offering you this giant loan FIRST, which minimizes their risk.
A bank could make more money by splitting that 320k mortgage loan they’re giving you into 10k personal loans at higher interest rates for 32 people, but their risk is higher because of this. That 320k they spent on you is locked up for the next 30 years, to simplify. So they must make a return on the money they lent you because they can’t lend that 320k to other people.
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