September 5, 2017

Think about the term, amrtization and the frequency of debt consolidation.

Banks have actively encouraged consumers to use their homes like ATMs – every three to five years as the mortgage comes up for renewal consumers would be encouraged by banks to consolidate their unsecured debts into their mortgages.  This would eat up any equity in the property and free up the lines of credit and credit card limits facilitating more spending.

The effect of having a “term mortgage” system is that it allows the lender to take a twenty-five year mortgage and extend it indefinitely by rewriting the mortgage at the end of each term.  A $300,000.00 mortgage at 6% taken out over a five year term with a twenty five year amortization would result in (five year) term interest of $84,675.00 or a total of $275,826.00 in interest over twenty five years.

Imagine a 25 year old taking out a $300,000.00 mortgage at 6% interest and every five years s/he consolidates unsecured debt into the mortgage for a maximum of four times before they stop consolidating and focus on paying down the mortgage.   By age fifty the borrower would have made the last consolidation (to the value of $300,000.00 – assuming that the property value never went up – which of course it will making this example very light).

After the first five years the borrower would have paid the $84,675.00 in interest after ten years that value would be doubled and so on with more and more interest paid every five years.  At the end of the exercise a total of $699,201.00 would be paid as interest plus the principal of $300,000.00 for a total purchase price of $999,201.00 for the property and finally being mortgage free by age 75.