Paying for the house twice
2 min · 4 chapters
Personal finance. A sample lesson, free to watch.
The question
Why do you pay back twice what you borrowed for a home?
The lesson in words
Twice over
You borrow three hundred thousand to buy a home, at six percent a year, over thirty years. Month after month you pay it back. By the last payment, you have handed over six hundred and forty-seven thousand. More than twice what you borrowed. How does six percent turn into more than double?
The bank goes first
Every month, the payment is the same: about eighteen hundred. It is natural to picture each one split the same way: part for the home, part for the bank. But the bank goes first. You still owe three hundred thousand, and one month of interest on that is fifteen hundred. Only what is left, just under three hundred, comes off your debt.
Thirty years of payments
Next month you owe slightly less, so the interest is slightly less, and slightly more gets through. But slightly is the word. Ten years in, the bank has had a hundred and sixty-seven thousand, and your debt is down by just forty-nine thousand. Not until year nineteen does half of a payment come off the debt. By the end, three hundred thousand has gone to the home, and three hundred and forty-seven thousand to the bank: two thirds of it in the first fifteen years. It was never six percent of the price. It was six percent a year of whatever you still owed, and for most of those years, you still owed most of it.
A little extra, early
That is why a little extra, early, does so much. The interest is already covered, so all of it comes off the debt. And debt that is gone never charges interest again. With a hundred more each month from the start, the loan ends almost four years early, with fifty-three thousand less in interest. Same loan, same rate. All that changed is how long the debt stayed large.
Stuck on something else?
Type it in your own words and Knotstuck makes a lesson like this one for it.