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What are these mortgages in this financial crisis?

To understand which types of mortgages are involved in the financial crisis, let’s have a look at what types are available.  In simple English, here is a description of several types of mortgages…

1) Simple mortgage – no amortization:

An individual borrows $100,000 at fixed 5% per annum for 20 years.  This loan is repaid as follows – First year Interest of $1250 would be paid April 1, July 1, October 1 and January 1 – Principal of $5000 would be paid every January 1.  Each year the interest payment is 1.25% of the outstanding balance quarterly, the yearly balloon principal payment is 5% of the original balance, that is $5000.  At the end of 20 years the debt is zero. There are two inconveniences with this type of mortgage.  The first year contains the largest interest payments and largest total payment for the year.  Secondly, the debtor must be disciplined enough to save $100 a week in an escrow account, so that $5000 is available for the principal payment due on January 1.  Please note that the total of the interest and principal payments the first year is $10000.  The second year is $9750.  The third year is $9500.  And so on until the last year which is $5250.  The total money paid,  interest and principal over 20 years is $152000.  This is a simple mortgage and not popular in today’s ‘me now’ society.

2) Let’s compare it to the typical 20 year fixed 5% mortgage with amortized payments in today’s market.  Monthly payments are fixed at $659.96.  The total cost of the mortgage over 20 years is $158390.40.

3) Here’s the data for a typical 30 year fixed 5% mortgage with amortized payments in today’s market.  Monthly payments are fixed at $536.82.  The total cost of the mortgage over 30 years is $193255.20.

Accordingly, your reward for paying more per year early in the life of the simple mortgage contract will be $6390.40 when compared to an amortized 20 year deal.  That is over 6% of the original loan amount.  You must sacrifice some disposable income initially and you must establish some financial discipline.  Again, your reward is over $6000.  Moving on to the 30 year deal.  The reward becomes $40755.20.  That’s over 40% of the original loan amount!

Technorati Tags: Balloon payment, Escrow Account, Financial Crisis, Interest Payment, Monthly Payments, Mortgage Contract, Original Loan Amount, Principal Payment, Simple Mortgage, Types Of Mortgages

Tags: Balloon payment, Escrow Account, Financial Crisis, Interest Payment, Monthly Payments, Mortgage Contract, Original Loan Amount, Principal Payment, Simple Mortgage, Types Of Mortgages