When a homebuyer takes out a mortgage, the payments made in the early years will be comprised of up to 85% interest, and just 15% principle.
As the years progress, however, the percentage of principle and interest will even out and eventually the payments will be comprised of more principle than interest.
This is known as the mortgage rate curve, and it can have serious implications for homebuyers.
For example, If you were a new homebuyer with a $200,000, 30-year mortgage with an interest rate of 6%, after diligently making payments for an entire 3 years ($43,200 payments in total) you would still owe $192,000 on your home.
This means that during the last 3 years, you paid your banker $5.
40 for every $1 that went to pay back the loan.
This can have effects that homeowners may not have expected.
The common advice is that if you can afford a home, you should buy one.
This is great advice...
for your lender's sake.
The Implication of Time The real implication, however, is the time value.
Because mortgage rates start out in favor of the lender and slowly move in favor of the borrower, holding the mortgage for a longer period of time could be a wise decision.
For example, over 10 years, that scenario would look much better.
Instead of paying $5.
40 to your banker, it would be $3.
33 to your banker (averaged over the 10 years) for each $1 to pay down your debt.
If you are able to hold a mortgage for an extended period of time, it would certainly be in your favor to do so, at least from the mortgage curve perspective.
This article cannot cover all of the financial intricacies of the lending industry, however, if you have further questions or would like to research this topic in more depth, search for the topics: mortgage amortization table, mortgage rate curve and others.