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Zer Netmouse
February 3rd, 2009
07:12 pm

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Do You Believe in Usury?

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From:dd_b
Date:February 4th, 2009 02:42 am (UTC)
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Sure, the interest total on a home mortgage is huge -- but that's also over 20-30 years! Not having the money for 20 years is worth something; people wouldn't do it if they didn't get something for it.
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From:netmouse
Date:February 4th, 2009 02:53 am (UTC)
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Mortgage loans are an interesting topic, really. The way they are amortized intentionally treats regular payments on the loans as addressing, first and foremost, the interest owed over the lifetime of the loan, so that the early payments are defined to have made almost no payment on the principal, keeping the overall payoff to the bank high (and reducing the motivation for early buyout, since the borrower won't have lowered the "payoff price" of the loan very much in the first couple years of it). This is why you can save yourself *so* much money by paying an additional amount to the principal on a monthly basis on a mortgage (noting that most mortgage companies require that you "specify" the extra money paid is to be applied to the principal, or they screw you over by applying it to interest also).
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From:dd_b
Date:February 4th, 2009 03:18 am (UTC)
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You can say it "treats" it that way -- but the fact is that if you borrow $100,000 over 20 years, after the first payment you still have $99,999.99 of my dollars (I didn't do the math; the point is "essentially all"). So it seems fair that, while you still have most of my $100k, I should still get most of the payment as interest. Whereas just before the last payment, you only still have a tiny amount of my money, so it's completely fair that that last payment consists of the last principal you owe me plus only a tiny amount of interest.
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From:netmouse
Date:February 4th, 2009 03:24 am (UTC)
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At the outer edges it is easy to relate to it as fair, but in the middle, say, the 10th year, a huge proportion of the interest will be paid off, and still not much of the loan principal - in other words, the mortgage lender earns its profits in the first few years of the loan, thus securing itself, so that in the last few years there is little risk for the lender - they have already made their money.
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From:dd_b
Date:February 4th, 2009 03:44 am (UTC)
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I've got my profit already, but my capital is still at risk, so really I'm not anything like in the clear on this transaction yet.

From:sethb
Date:February 4th, 2009 04:30 am (UTC)
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Huh? The lender is always getting (say) 6% on the amount of money it has invested.

It starts by investing $100,000. In year 1, it gets $6,000 interest, and $1,000 principal. (I'm making up numbers for simplicity.) In year 2, it has $99,000 at risk, and it gets $5940 interest, and $1060 principal. The bank doesn't get its money back until the end; each year, it gets 6% on the money it still has at risk.

The bank also is short the prepayment option: if interest rates rise, you keep the mortgage and the bank gets 6% when a new mortgage would get it 8%. If interest rates drop, you refinance and the bank gets 4% on a new mortgage.
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From:sethb
Date:February 4th, 2009 04:34 am (UTC)
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A 30-year loan that charges half the principal in interest is 1.67%. Keep dreaming.

Are you forgetting that the borrower gets the use of the house?
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From:netmouse
Date:February 4th, 2009 12:10 pm (UTC)
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So what, you're saying the borrower is responsible to pay not only interest on the capital loan, but also some sort of rent to the bank?
From:sethb
Date:February 4th, 2009 04:26 pm (UTC)
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No, I'm saying that a house isn't bought for profit but for living in. The bank charges rent (called "interest") for its money. Someone who views a house purely as a financial investment (and isn't planning on renting it out) will make bad decisions.
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From:sethb
Date:February 4th, 2009 02:54 am (UTC)
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So if I lend you money for 25 years at 5%, that's morally questionable; but if it's a 1-year loan, and at the end of that year you repay me and borrow the money again, repeat for 25 years, that's fine because each loan is only 5% total interest? Did you notice that there really isn't any difference between the two cases, except a check going back and forth each year?
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From:netmouse
Date:February 4th, 2009 03:05 am (UTC)
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I don't get your logic, Seth. If I need 25,000 now and can pay it back in 25 years (roughly 1,000 per year), the comparison is not to paying and borrowing 25,000 every year for 25 years, it's to borrowing 25,000 the first year, 24,000 the second year, and so on down to 1000 the 25th year. Is it not?


From:sethb
Date:February 4th, 2009 04:35 am (UTC)
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For simplicity, I was assuming a loan that paid interest only until maturity. (And even if it amortizes, that just means that each year you borrow less, equal to the amount the 25-year loan would have as its balance on that date.)

My point is that the same transaction can be structured as a single loan or a series of loans, with the same cashflows, so why should one be morally different from the other?
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