I was one of those "company men" that worked and still does work for a Large comercially well known Mortgage Bank....I was set in my Ways of how I thought things worked or were supposed to work in regards to Institutional lending....I am your "typical" type A personality that thought I had it ALL figured out...
I WAS WRONG
I was Blown away when this finally sunk in....Be prepared to be shocked...continue reading....
"The Asher Institute for Consumers is a non-profit consumer advocacy organization that was formed in 2003 to educate and inform consumers about various issues so they can make informed decisions in regards to finances, banking and mortgages. The 25 page article, a.k.a. consumer guide, they wrote is entitled, "Profiting from the Banking Industry's Biggest Secret."
We will show how the mortgage profit game works and how consumers are misled into making a decision that ends up costing them their single best opportunity to be wealthy.
The Truth about the 30-Year Fixed Loan
When it comes to mortgages, most consumers are fairly knowledgeable and are able to choose between the various loan products available and select the one that best fits their needs and risk tolerance. The most highly promoted and most sought after loan is the 30-year fixed-rate mortgage.
Why? Because consumers like the stability of a low fixed rate and a low fixed payment. However, the Asher Institute revealed some shocking truths about the 30-year fixed that stunned both consumers and mortgage industry experts alike.
The Asher Institute found that only one of the two reasons consumers like the 30-year fixed mortgage was actually true.
Which one is false?
The part about the interest rate being fixed. Contrary to public opinion, the interest rate on a 30-year fixed rate mortgage is actually an ADJUSTABLE RATE MORTGAGE and the rate consumers are paying on them is much, much higher than they could ever imagine.
The rate is so high, in fact, that it completely blocks the average consumer's path to financial freedom.
In a couple of pages, you'll see an Amortization Schedule for an average American conforming loan, a $150,000 30-year loan at a "fixed" interest rate of just 6.0%. The Amortization Schedule shows how the loan really works.
Here are some of the facts gleamed from the Amortization Schedule:
- Each year the consumer pays $10,792 but a different portion of that total gets credited to Principal and to Interest.
- It takes 19 years before just half of the payment goes to Principal.
- It takes 24 years before 2/3 of the monthly payment goes to Principal.
- After 10 years, 84% of the starting balance is still owed.
- After 21 years, half of the starting balance is still owed. (At that point, the consumer will have paid $226,800 with only $75,000 of it going to Principal.)
Amortization Schedule
$150,000 30-YEAR FIXED-RATE MORTGAGE AT 6.0%
"THE LENDER" "THE CONSUMER" PAYMENT = $899.33
Year Interest Principal Balance |
1 | $8,949.89 | $1,842.02 | $148,157.98 |
3 | $8,715.66 | $2,076.25 | $144,126.11 |
6 | $8,307.30 | $2,484.61 | $137,096.93 |
9 | $7,818.63 | $2,973.28 | $128,685.25 |
12 | $7,233.84 | $3,558.07 | $118,619.16 |
15 | $6,534.04 | $4,257.87 | $106,573.27 |
18 | $5,696.60 | $5,095.31 | $92,158.18 |
21 | $4,694.45 | $6,097.45 | $74,907.92 |
24 | $3,495.20 | $7,296.71 | $54,264.88 |
27 | $2,060.08 | $8,731.83 | $29,561.75 |
30 | $342.70 | $10,449.21 | $0.00 |
The numbers are heavily skewed in favor of the lender because they are designed to be. It's due to something most consumers are familiar with - front-end load interest.
The result of this system is that the lender collects their interest first, up front. Seems fair, right? But, the Asher Institute also found that the front-end load completely throws off the fixed interest rate schedule.
Look at Year 1. The consumer pays $10,792 ($899.33x12) but only $1842 of it gets credited back to Principal.
What if this house was sold after the first year? Would it seem like 6.0% interest rate was paid? Look at what happens if we were to sell after 9 years. The consumer will have paid $97,128 but less than $21,315 will have gone to Principal. That's not a 6.0% interest rate!
The same holds true for a longer period of time like 21 and 24 years.
So if a 30-year fixed mortgage loan is kept for even 1 month less than 30 years, the rate consumers really wind up paying is higher. How much higher?
The Asher Institute came up with a formula, called the "Effective Rate Formula", that reveals what the real interest rate would be if a front-end load loan was kept for less than the entire 30-year term.
When they applied this formula to the sample 6.0% 30-year loan, the results were scary:
- After 25 years, the consumer would have paid almost $270K, with only $104K in loan equity. The actual rate paid would be 9.43%, not 6.0%!
- After 20 years, the effective actual rate paid would be 14.82%
- Holding on to that low 6.0% interest rate for 10 years would result in paying an actual 43.48% interest rate!
- Holding it for 3 years yields an actual 182% rate
- 1 year --> a 580% rate! <--
Hundreds of consumers and mortgage industry experts were informally polled with the following question:
| If you held a 6.0% 30-year fixed-rate loan for 7 years, considering that the interest is front-end loaded and you're not waiting the 30 years, what rate do you think you'd really wind up paying? |
The responses given by consumers were what spurred the Asher Institute to develop their consumer guide. Without fail, each consumer and expert guessed between 8% and 12% with an occasional high guess of "triple" which would represent 18%.
The guesses were logical but so far off that it was clear that a major misconception existed!
It was also clear that these numbers had never been disclosed to consumers. No one had ever heard of an "Effective Rate Formula" - it seemed like consumers were aware that mortgage interest is front-end loaded but no one realized exactly how front-end loaded it really is.
Due to the interest rate being front-end loaded, the rate becomes ADJUSTABLE based upon how long the loan is kept. On a 6.0% 30-year fixed, the low "fixed" 6.0% Note Rate is the absolute MINIMUM rate the consumer will pay.
Even though the monthly payment is fixed, the consumer may wind up paying as much as a 580% interest rate, thereby actually making this fixed-rate mortgage an Adjustable Rate Mortgage.
The banks have been relying upon consumers to concentrate on the fact that it will all even out 30 years later. But who keeps the same mortgage, let alone the same house, for 30 years? Nationally, homeowner's keep their mortgages for 5 years on average.
Millions of consumers believe that the 30-year mortgage is a smart home loan with many benefits.
But that belief has been very costly - Americans have been standing in line to sign up for loans that are the equivalent of giant credit cards with APR's well over 100%!
Conclusion
The Asher Institute has identified that the 30-year mortgage does not work exactly as advertised and as a result, consumers end up paying a much higher rate than they believe.
Consumers have accepted these loans partially due to a lack of information, which has misled them into shopping for the wrong product.
A solution has been identified - if consumers want the lowest rate on their home loans, they should be shopping for the shortest possible term they can qualify for, NOT the lowest Note Rate or the lowest fees. The term of the loan has more bearing on the real interest rate than any other factor.
You can overturn the banking industry's profit game by using a short-term "interest cancellation" loan (what we call an ALOC) to expedite equity growth and increase your wealth at a dramatic pace.
Find out how you can retire early - view our MMA video (Step 2) to see exactly how a Money Merge Account can help you live the American dream! http://www.loanacceleration.net/
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Judy is correct. Good post - just in the wrong group.