One aspect of mortgages (and any other loan product) I unfortunately didn’t fully appreciate until after those 100 documents were signed was that the interest would be front-loaded.
So, on a 30 year fixed mortgage the rate you think you’re getting on your loan is only truly that rate when and if you ever make 30 years worth of payments. If you refinance or sell prior to the 30 years, your actual interest rate is higher–possibly much higher.
I can understand why this is the case. Collecting the interest up front acts as a hedge to protect the lender from default. More money is collected than would have otherwise if the interest was equally spread out over 30 years of payments.
Here is what I propose: If a loan is paid off early, through a sale or a refinance, the amount of interest paid by the borrower should be recalculated so that any interest paid over the amount that would have been paid if the interest charges were evenly spread over 30 years worth of payments be REFUNDED. After all, if the loan was carried through to its original terms, the lender would see no difference in the amount of interest collected.
Borrowers who refinance or sell early basically overpay on what was advertised as a “fixed rate” mortgage. But a mortgage is only truly “fixed rate” if the 30 years runs its course. When it is paid back early due to a refinance or sale the actual rate charged is much higher.
Why should lenders benefit from this windfall ill-gained by front loaded interest? If it is meant to protect the lender from defaults why should the borrower be punished if they do not default?
This is yet another example of the lack of financial knowledge I suspect the vast majority of borrowers suffer from. At the very least, the front-loading aspect of interest payments should be a separate disclosure required for the processing of any loans.
financefinesse 