Why do you have to pay so much interest up front on a mortgage?

Question

I understand how a mortgage interest and principle is determined by an amortization formula. My question is How is it legal for a lender to be able to do this? Is it a law? or has it just become "the way it is".

Thanks for you answers.

Answer 1

A mortgage amortization is the same as most cars.  Its the same formula.  Its not a legal law, it is a mathematical law based on interest, term, and balance originally borrowed.  The formula basically says I want a loan were my payment is paid monthly, all the payments will be equal, and at the end of the term my balance will be zero.  The lender says I want to be paid an annual percentage of X on any unpaid principal every year.  So in summary if you borrow money from someone and they want to be paid a certain percentage every year on what you owe them but you want a fixed payment to be paid monthly were as the ending balance is zero over however many years that is how it all works out mathematically.  No deception, no trickery just some basic math, think about it.  If you changed one thing in the formula it would all change, for example if you didn't want your balance at the end of the term to be zero you would just pay the first months high interest portion for however long the term is.

Answer 2

In the 1930's when mortgages became popular, you only paid interest.  The problem is that you had to refinance the loans every 5 years.  When loan money dried up, you couldn't refinance because you had no equity.  The amortization makes sure that you are gaining a little equity every month.  It is much better than the way they do car loans. /