Joshua Caleb @JFence2002 - Twitter Profile

Ten years into a 30-year mortgage you have paid off about 15 percent of what you borrowed. Not a third. Fifteen percent. The schedule that does this was designed on purpose, by the US government, in 1933. And there's one line of arithmetic behind it that means no loan can ever surprise you again. Here it is. Interest each month is only ever your remaining balance times your annual rate divided by 12. That's the entire rule. Whatever is left of your payment goes to principal. Take a 300,000 dollar loan at 6.5 percent over 30 years. The payment is 1,896 dollars. In month one the balance is still the full 300,000, so the interest is 300,000 times 0.065 divided by 12. That's 1,625 dollars. Principal that month: 271 dollars. You aren't being robbed. You're paying rent on money you still owe, and at the start you still owe all of it. Run it forward and it gets heavy. After ten years you've paid about 182,000 dollars in interest and taken 45,672 off the balance. Half the balance isn't gone until month 257, more than twenty-one years in. Across the full term the interest comes to 382,633 dollars on a 300,000 dollar loan. The same rule hands you the lever. Interest is charged on the balance, so anything that cuts the balance early removes interest from every month after it. On that same loan, an extra 200 dollars a month against principal ends it in 23 years instead of 30 and takes 103,449 dollars of interest off the total. Do it on your own loan tonight. Balance times rate divided by 12 is this month's interest. What's left is what you actually bought. Now the part almost nobody knows. In 1932 this loan did not exist. You put down half the price in cash, you paid interest only for about five years, and then the whole principal came due in one payment. Loans got rolled over again and again, and when the rollovers stopped in the early thirties people lost the houses. What Washington built to replace that is the reason your first ten years look like this.