“When your banker tells you that your interest rate is 8% per year…is it really?” I found out it’s not if you learn to read the numbers.
Let’s say you buy a $100,000 home, make a down payment of $20,000 and borrow the remaining $80,000 at 8% interest with a 30-year term from your bank. In five years you will pay a total of $35,220 to the bank: $31,276 for interest, and only $3,944 for debt reduction. If you take the loan to term, or 30 years, you will have paid $211,323 total principal and interest, less what you originally borrowed – $80,000. The total interest you will have paid: $131,323. By the way, that $211,323 does not include property taxes and insurance on the loan.
Funny, $131,323 seems to be a little bit more than 8% of $80,000. It’s more like 160% in interest over 30 years. As I said, they are not lying…they are just not telling the whole truth. And if you cannot read numbers, you’d really never know. And if you’re happy with your house, you’ll never really care. But, of course, the industry knows that in a few years…you’re going to want a new house, a bigger house, a small house, a vacation house, or to refinance your mortgage. They know it and, in fact, count on it!
– Cashflow Quadrant (Kiyosaki, R.) pg.106-107
The passage above is a prime example of how a person without financial literacy will enter an agreement completely uninformed and will accept anything their banker tells them when they say things like, “This is a great deal,” or, “That interest rate is as low as I can go.” Do the MATH, learn to read the numbers and be a more informed buyer.