How to Beat the Banks at Their Own Game with Your Mortgage

Lately, I’ve seen several people claim that they have figured out how banks make all their money up front on mortgages. They say that banks charge you all the interest up front and none of the interest in the back, when it should be level. They say that it should be the same interest every month until the mortgage is done. But that’s not how loans work.

When you have an interest rate, it’s based on the value of that loan. Since the value of that loan is higher initially, because that’s when you first took it out, the interest rate or the interest on it is a lot higher. For instance, 4% on 100,000 is $4,000. 4% on 10,000 is $400. Same interest rate, different value.

So initially, when your home value or your home loan is high, your interest on that is high. So when you make your payment, a large percentage of that payment is going to interest and a small percentage is going to the principal. That’s why you see people who make double payments turn a 30-year mortgage into a 7-year mortgage. Because that’s how you get a lot of money going towards the principal. And when you’re reducing that loan faster, then the interest that you’re originally scheduled to pay is smaller. So if you make a lot of extra payments in the first couple of years and then you go back to the regular scheduled payment, you’ll still pay it off a lot quicker. Because the interest that they were expecting you to pay is less, because the value is less than they projected.

So if you’re the type of person who feels like the bank is getting theirs first and they’re playing tricks to take advantage of the people by charging interest up early and not equally throughout the loan, then play the game right back. Pay more, because then the interest that they’re projecting to make is a lot less.