http://www.youtube.com/watch?v=5y8fNbM0-t0
The rule of 72's (read below for simplified definition and explanation of the time value of money).
http://calrealestatefinance.com/?p=15
When a loan is taken out for double the amount of time (from 15 to 30 years) generally the borrower assumes stability for that period of time, and in this case that denotes borrowers expectations that they will be able to fulfill the terms of the loan. In the months before the bubble burst borrowers were signing up for mortgages that had interest only options....... this means that the borrower is essentially paying nothing on principle and will accrue no equity over the life of the mortgage. Also it means that the bank owns your house after the 30 years is up or the terms of the loan are fulfilled. (30 years of renting)
The lender charges interest on principal for every year of a mortgage and some times continuously or compounding every minute.
The interest is charged to remaining principal (or the amount taken out originally say 300,000 would be the principal of a 300,000 mortgage) of that loan. In a mortgage the borrower pays mostly interest in the beginning of the loan and eventually pays mostly principal towards the end of the loan. AKA the bank gets its return on investment first and then you get to pay back what you borrowed.
So, the change in expectations or the bursting of the bubble in terms of the value of homes has lead to a more savvy consumer. I like to think that the guy in the 30 year mortgages are Satan as the new savvy consumer...
What do you think about the changes in mortgages, length (15 vs 30 years), terms (interest only adjustable rates ect), lending practices (commission for the amount of mortgages closed for loan mortgage brokers), and finally homeowner expectations (of stability and future home values)????
This was a great video! The graph he uses around the 3:30 mark comparing a 15 and 30 year loan really shows how startling the difference is. During the bubble I can understand how all the optimism toward the housing market and lower interest rates could push people toward a 30 year mortgage but when, as the video says, the majority of payments go to the bank just to pay off interest. Borrowers need to really be careful when picking a mortgage, as we've learned, and understand all of their options first.
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