David Hawkins Posted February 11, 2010 Report Share Posted February 11, 2010 If they can make it where you are paying MORE Pricipal from the start, Then maybe if the (and when) the Market drops again, your will own Less (or the same) as what you Home is Worth when the Market drops. http://news.yahoo.com/s/ap/20100211/ap_on_bi_ge/us_citigroup_foreclosures Maybe they should redesign how they charge Interest. I have a 400.00 a Month Mortgage, been paying it for about 6 Years and the Principal is NOW just at $31.00. How much of your Payment is Principal and how much is Interest. I know the more you Pay on it, the Principal amount increases but not that much until you have been paying on it a long time. Link to comment Share on other sites More sharing options...
jmn444 Posted February 11, 2010 Report Share Posted February 11, 2010 If you get a note with no prepayment penalties or other verbage, there's nothing stopping you from paying more principle in advance. What you are suggesting about banks setting it up differently would only work if people wanted to pay a different amount each month under the loan agreement, ie a set principle payment PLUS the current interest for the month.... it would result in smaller payments towards the end of the loan, but much larger payments up front. Sounds good until you realize your purchasing power just got cut in half or more because of lending ratio requirements... not saying it's a bad idea, but most people can't deal with all of that and just need a single amount to pay each month. Link to comment Share on other sites More sharing options...
David Hawkins Posted February 11, 2010 Author Report Share Posted February 11, 2010 If you get a note with no prepayment penalties or other verbage, there's nothing stopping you from paying more principle in advance. What you are suggesting about banks setting it up differently would only work if people wanted to pay a different amount each month under the loan agreement, ie a set principle payment PLUS the current interest for the month.... it would result in smaller payments towards the end of the loan, but much larger payments up front. Sounds good until you realize your purchasing power just got cut in half or more because of lending ratio requirements... not saying it's a bad idea, but most people can't deal with all of that and just need a single amount to pay each month. I am suggesting more of a Lender Fee system: Home Loan = $200,000.00 30 Year Lender Fee $100,000.00 Total $300,000.00 Payment $833.33 a Month Principal Amount $555.55 Lender Fee $277.78 If Paid Off early the Lender gets Principal + 5% (if Principal Balance is $125,000.00, the 5% Fee will be $6,250.00 making the Pay Off $131,250.00). Figures change for different Amounts and for fewer number of Years Financed. Keep in mind that this is just a sample. I know the Banks will NEVER go for any thing like this because they wont be making a bundle of Money off each Loan, but it would be nice if they would do it. Link to comment Share on other sites More sharing options...
cobrakalas427 Posted February 11, 2010 Report Share Posted February 11, 2010 If they can make it where you are paying MORE Pricipal from the start, Then maybe if the (and when) the Market drops again, your will own Less (or the same) as what you Home is Worth when the Market drops. http://news.yahoo.com/s/ap/20100211/ap_on_bi_ge/us_citigroup_foreclosures Maybe they should redesign how they charge Interest. I have a 400.00 a Month Mortgage, been paying it for about 6 Years and the Principal is NOW just at $31.00. How much of your Payment is Principal and how much is Interest. I know the more you Pay on it, the Principal amount increases but not that much until you have been paying on it a long time. The majority of residential mortgages allow for prepayments of principal either on a monthly basis or anytime during the life of the loan. The only time prepayment penalties usually are written into Notes or Addendums to Notes is when the property is either a non-owner occupied 2nd home or the property is commercial (non-residential). Most of the fixed rate commercial lending is short term (5, 7 or 10 year balloons). Lenders price in the interest projections when they establish an interest rate for these types of loans and the prepayment penalties allow them to recoup interest in the event of premature payoff. Since lenders charge interest on the unpaid balance, the amount of principal paid on a monthly basis is usually very small. The borrower can request a bi-monthly payment arrangement with his lender if they want to pay down the principal at a quicker pace and pay less interest over the life of the loan if the lender agrees to this type of arrangement. The borrowers monthly cost is the same, the only difference is that the lender is being paid twice a month from the borrower as opposed to only once a month. Consequently, the loan is being amortized at a faster pace and therefore is paid off sooner. However, most borrowers that live paycheck to paycheck can't afford to pay 2 half payments each month so instead they pay 1 whole payment and effectively borrow the money for a longer period of time thus paying a larger amount of interest in the long run. Link to comment Share on other sites More sharing options...
cobrakalas427 Posted February 11, 2010 Report Share Posted February 11, 2010 I am suggesting more of a Lender Fee system: Home Loan = $200,000.00 30 Year Lender Fee $100,000.00 Total $300,000.00 Payment $833.33 a Month Principal Amount $555.55 Lender Fee $277.78 If Paid Off early the Lender gets Principal + 5% (if Principal Balance is $125,000.00, the 5% Fee will be $6,250.00 making the Pay Off $131,250.00). Figures change for different Amounts and for fewer number of Years Financed. Keep in mind that this is just a sample. I know the Banks will NEVER go for any thing like this because they wont be making a bundle of Money off each Loan, but it would be nice if they would do it. This will never happen...lenders make all of their money when the borrower has an outstanding loan balance that is paid off very slowly. When a lender charges interest on the UNPAID balance each month, the beginning interest amount is probably 90-95% of the payment (excluding any tax or insurance escrows). There is no incentive for a lender to charge a 50% lender fee and amortize it over 30 years. Automobile loans are simple interest, residential and commercial real estate loans are not. Besides that, interest paid on a mortgage is a deductible item on a federal tax return as of right now. How many people could afford this type of loan if they couldn't deduct a "lender fee"? Also, with credit as tight as it is right now, how many people would be able to qualify for your type of loan using todays strict lending guidelines? Link to comment Share on other sites More sharing options...
jmn444 Posted February 11, 2010 Report Share Posted February 11, 2010 I am suggesting more of a “Lender Fee” system: Home Loan = $200,000.00 30 Year Lender Fee $100,000.00 Total $300,000.00 Payment $833.33 a Month Principal Amount $555.55 Lender Fee $277.78 If Paid Off early the Lender gets Principal + 5% (if Principal Balance is $125,000.00, the 5% Fee will be $6,250.00 making the Pay Off $131,250.00). Figures change for different Amounts and for fewer number of Years Financed. Keep in mind that this is just a sample. I know the Banks will NEVER go for any thing like this because they wont be making a bundle of Money off each Loan, but it would be nice if they would do it. This (in theory) could be structured to maintain the same overall profitability of each loan, but the lender fee would likely end up being higher than the interest paid over the life of the loan due to the time value of money and the likelyhood that the bank could be paying out more in current interest payments on money it has borrowed than it collects on new loans... also, thinking in terms of risk, it makes more sense to collect larger "fees" when the balance is higher and thus riskier than it does to spread it out evenly. The 5% penalty would also have to be much larger to make sense for a lender because as it currently is structured, a lender collects about 75% of the interest by the 15 year mark on a 30 year note.... so in your example, the lender would have collected $50K by the halfway point in comparison to $75K as it stands now, so the penalty would need to be extremely prohibitive to discourage refinancing. Hopefully that makes sense, i'm a little sleepy today! In a nutshell, I'm trying to say that even though it's "possible" to structure debt like this, it would likely NOT be in the best interest of the borrower to do it this way. Link to comment Share on other sites More sharing options...
Recommended Posts
Archived
This topic is now archived and is closed to further replies.