The 30-year fixed-rate mortgage is a great instrument that has made home ownership possible for millions of consumers, but none of them like the idea of being in debt for 30 years. Those who like it the least and have the poorest understanding of how mortgage amortization works are vulnerable to payoff scam artists, who keep popping up with allegedly easy ways to pay down the balance faster.
It has been a while since I last wrote about these schemes, but some recent developments provoke me to do it now. In recent weeks, the Consumer Financial Protection Bureau has taken legal action against Nationwide Biweekly Administration “for luring consumers with false promises of mortgage savings.” And Wells Fargo, the largest mortgage lender in the country, has rolled out a weekly payment program that deserves careful scrutiny.
THE BASIC ARITHMETIC OF MORTGAGE REPAYMENT
The basic arithmetic of mortgage repayment is not rocket science, and if you understand it, you will be invulnerable to deception. Let’s assume you have a 30-year mortgage on which the current balance (the amount you owe) is $100,000. The annual interest rate is 4 percent, and the monthly payment due July 1 is $477.42. The interest portion of that payment would be $333.33. When the lender receives your payment, he takes that amount as his interest earnings, and the $144.09 that remains, called the “principal,” is used to reduce your balance. After 359 more payments of $477.42, the balance hits zero. That’s why it is called a “fully amortizing mortgage”.