The purpose is to stop you selling the house without the bank knowing about it, and you keeping ALL the money, rather than paying back the bank what you owe them. What Sal means is that the official ownership documents for the house (the 'deeds' or 'title deeds') are kept in a safe at the bank. How on earth is it legal to make these contracts without disclosing the consequences? Khan academy, please post a video on this topic. The average homeowner sells their house after 7-10yrs, so what is the ACTUAL interest rate paid by most homeowners? Pretty astoundingly high. Imagine you sell a house after 5yrs, and 80% of your payments up to that point had been going to interest, do you think you still paid the signed 5%? Not even close. I would really appreciate a video showing the investment perspective of mortgages, particularly the return on investment of paying a house off early, and also the effective interest rate if a house is SOLD early.

When I bought my house, I did not understand the mortgage from an investment perspective. You have to request a re-cast, and pay the bank to do this, IF it is available for your type of loan at all (it was not available for mine). The video is unclear on this point, and makes it seem like the bank will do this automatically, as they should.

A re-cast is a recalculation of the amount of interest that SHOULD be paid. The ONLY way paying down the house early becomes a reasonable investment is if you get the loan recast. The actual value will be a fraction of a percent, which is a very poor investment. That tiny triangle is nowhere NEAR the return you would get from an alternative investment at a compounded 5% rate. If you were to pay down interest such that you could pay off the house 5yrs early, you would save that small triangle of interest between the 25th and 30th year of the loan. Why? It is easiest to understand geometrically/visually, looking at the amortization graph in this video. That DOES NOT mean your return on investment is equal to the interest rate of the house. I am not an expert, but this is how I understand it: The khanacaduser is correct, you pay off the mortgage from the back end, and continue to make the same payments. Note that in both special cases, the bank makes more money off of a student loan than a regular loan because the loan doesn't get paid off at all in the beginning, where as most loans have a payment that is some percent principal, and the rest interest.Īs a homeowner who recently came up against this exact question, I would strongly caution against Ctrader's response. But this is even worse, because unlike the other 2 scenarios where you pay back a 20k loan, now you have 2 years worth of interest on that loan, which makes it like you have only 13 years to pay back a 22k loan, which makes your payments closer to $200 a month. At the end of those 2 years though, your balance is STILL 20k, and so its essentially like you have paid the bank almost $2000, and now you only have 13 years left to pay of a 20k loan, which makes your payments for the rest of the 13 years closer to $170 a month instead of the $150 before.Īnother thing done by some banks, is that you are allowed to not pay anything for two years after you graduate. Then your payments are roughly $80 every month for the first 2 years. Then your payments are roughly $150 every month.īut many student loans allow you to pay off only the interest each month for the first 2 years or so. Your student loan is for $20k, to be paid back over 15 years at a 5% interest rate. That being said, it is my understanding that the bank makes just as much money (if not more in some cases) on student loans as it does other loans. Let me first say that I am not an expert, and what I say is a reflection of what I have learned here in conjunction with my own experience.

Calculator to pay down mortgage