Submitted by TenDogsInATrenchcoat t3_126nqo7 in personalfinance
According to the bank's calculations:
Loan of €250,000 €27,000 initial deposit Pay back ~€900 per month for 38 years Comes to around €410,400 Difference between final amount and loan amount = €160,400
Is this just a case of "welcome to adulthood" or is this not normal?
If they can. OP should look if his mortgage contact allows early repayment toward principal, and what the terms and procedures are.
They don't, that's why I was a bit confused. If you decide to pay back early, you still have to pay 38 years worth of interest.
>If you decide to pay back early, you still have to pay 38 years worth of interest.
This part is weird and not normal. Are you sure you read the terms of the loan right? Even for 'predatory' loans I have not heard of this before.
Edit: I am not a mortgage lender so its possible loans like these do exist and I don't know about them. But at a minimum I am confident that this is not the norm.
Edit 2: Apparently is legal in at least some parts of Europe. Y'all be wild in what you are letting lenders do. 😜
Maybe it's a European thing? His currency does use the Euro symbol.
I can chime in and say it's definitely not normal in the UK for one.
Brexit? /j
Ah, that's possible, how silly of me to miss that Euro symbol. I think most of this sub defaults to assuming "American financial regulations" unless otherwise specified.
Just logically that seems like a horrible idea though. If you sell your house before the 38 years are up you are automatically deep underwater because you will instantly owe six figures on top of whatever is not paid off yet.
Right?
Seems crazy to me.
Has to be. 38 year mortgages aren’t a thing in the US. I believe Japan (not sure) have 50 and 100 year mortgages? That’s just wild.
Typical mortgage in Japan is 35 years. Those 50+ year mortgages are few and far between here - reserved for special situations.
And the banks here require a term life insurance plan paid up front to secure the mortgage too if you die before paying it off. Japan banks have zero risk tolerance.
My dad was offered a 50 year mortgage when he purchased his current condo. (Midwest US in the early 2000s.
Note he was 65 at the time.
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>Due to the OP using the € I think they aren't playing by US rules at all.
Yes, I am a silly American and did miss that, thanks for catching and good explanation.
I am a bit horrified by how bad this sounds though. If u/TenDogsInATrenchcoat were to take this loan and try to sell their house before 38 years they would instantly owe six figures on top of the principle and be completely screwed, right?
Is it fair to say that this is a bad deal by European standards as well and OP should flip their lender the middle finger and do something else then?
Based on the comments I have decided to flip both middle fingers to this bank and look elsewhere. Thank you all for your help!
>is it fair to say that this is a bad deal by European standards?
Yes. Absolutely.
OP used the Euro symbol, so it may come from a country from the Euro zone. I didn't see more info about the country.
I can't talk for each specific country obviously. But a 38 years loan isn't the norm in a lot of euro countries (more like 20 or 25 max. Can go up to 30 in very specific circumstances). More importantly : the fact that the huge interests are due even with an anticipated reimbursement.
It's the case in my country (in the Euro zone) and very probably in all other euro zone countries : loans can be renegociated, in length and rates. Conditions of the renegociation can be specific to the loan/country (i.e. there may be a cost for the renegociation, that cost can be significant). Given the current level of interest rates, I would be very careful about the possibility of renegociating, and its cost. As there is a chance that interests rates will fall down again in 5,10 or 15 years, which considering OP's time-line would still be early
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>If you decide to pay back early, you still have to pay 38 years worth of interest.
Where in the contract does it say that?
Sounds more like a pay day/short term loan than a mortgage. Either you're mistaken or got screwed and should have read the fine print.
Maybe. The problem is that money has time value, so in practice paying down the mortgage faster will only save you money if paying down the mortgage happens to be the best investment for your money. It's possible, but it's also possible you will have the opportunity for better investments.
Yes, it’s called interest. The bank isn’t going to give you a €250k loan without making any money off it.
Your lender (the bank) should have given you an interest rate on the loan. I’m bad at math so I’m not going to try to figure it out based on the numbers you gave but it’s possible to figure it out.
Welcome to adulthood!! :)
And, as an added bonus, the majority of your mortgage payments goes toward the interest for the first 5-10 years. Note: typically additional payments or “overpayments” go directly to principal, but check your paperwork to verify
Most banks at least in the US give you an interest amortization calendar as well since the percentage of your payment that goes towards interest is higher at the outset of the loan.
It's not a mystery where the payment is going. Look at or ask for the amortization schedule along with escrow (taxes/insurance).
What is the interest rate? You have not given us one of the most important pieces of information. That said, and without doing any math(like you), it actually seems good for a 38 year mortgage.
38 year mortgages are a thing now?
welcome to adulthood
40 and 50 year mortgages have been a thing in the States for a while.
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yep. it sucks but perfectly normal. i paid $80,000 for mine in 1985, 30 year mortgage. after 22 years i had paid almost $120,000 when i sold it....still owed $80.000.
on a 30 year mortgage you will pay about 3 times the price. it's why they give out 30 year mortgages. not because it makes them money....because it makes them a shit ton of money.
The hell was your interest rate
about 9%. back then it was considered low....a real deal at the time. most were going for 12 to 15%
Must have been an interest only loan.
A 30-year, 9% mortgage, after 22 years should have owed $43,937.83. You would have paid $169,936.29 total in mortgage payments.
The 9% rate is a killer. Using 3% those numbers are $28,754.95 owed and only $89,042.77 paid. That’s a savings of $96,076.40 over 22 years.
Now use home costs from today and the differences are even larger.
You're looking at the nominal values, which is hugely misleading when discussing something that spans multiple decades. That 900 euro years from now isn't going to be worth much due to inflation. It's worth less than half after 36 years.
Instead, focus on the interest rate. You're the borrower now. Interest is the "rent" on the borrowed money. If you were the lender, you would want the borrower to pay you back a fair amount, too.
>Loan of €250,000 €27,000 initial deposit Pay back ~€900 per month for 38 years
Interest rate is =RATE(38*12,-900,250000)*12 = 2.86%. I don't know if this is considered low in Europe, but this is a very low rate in the US. There are plenty of things that yield more than 2.86%, including many risk-free instruments such as government bonds. This rate is even on par or below inflation. Assuming your income rises with inflation, you're actually spending less and less fraction of your income on home loan each year.
That's because you have to pay back your loan with interest. Think about it from the perspective of the people that loaned you the money. They need to make a return on the money that you rented from them.
If you were lending somebody €250,000, you'd probably want more back than you lent them. It's the cost of borrowing the money; you're basically renting money from them. Like if you rent a car, it's not enough to give the car back when you're done renting it; you also have to pay money for the cost of renting it.
Have you looked at your amortization schedule? Have you looked at the escrow papers that show how much of your payment is going into escrow to cover taxes and insurance? All the information is in the paperwork.
38 year amortization? Is that even a thing? I see you used EUR but that length seems insane to me when North America only somewhat recently started on doing 30 year loans.
Take a look at some early payment calculators too to play around with seeing what early payments can do to you for reducing interest paid to the bank and shortening the payoff period.
Personally I have a 25 year loan that I'm making some pretty aggressive extra principal payments against. When all is said and done the trajectory is that it'll be paid off in 18 years. Or we potentially have the option to "recast" our mortgage and lower payments (increasing total interest paid to the bank but decreasing pressure on us if things really go sideways).
Play around with this calculator to see how much you can save by doing extra principal payments https://www.calculator.net/mortgage-payoff-calculator.html
Note that this relies on the ability to make extra payments against the principal not prepaying for upcoming months.
These are the numbers I got playing with the calculator I linked above Loan 223k (250k - 27k downpayment) Term 38 years Interest 3.65%
Let's say you do an extra $100 a month, you could cut that down to 31 years of repayments and total interest paid to the bank is $149k which is less than the original 190k you would be giving the bank over those extra 7 years.
If you combine that with say an extra $1000 payment once a year you can shorten that even further to a repayment period of 27 years and only give the bank 127.6k in interest.
Thanks for the super detailed comment.
I'm lucky enough to be in a position where I can pay off a loan early, but from what I gathered, the bank in question will still charge you 38 years of interest, even if you pay it all back in say 20 years.
That is a ridiculous deal for you. If you pay the loan early, you shouldn't have to pay all the interest. That's the whole point of paying the loan early. I'd check with your lender. If that's what they're actually offering you, I hope you haven't signed this deal.
If you're able to pay it off early, at the very least get a shorter-term loan so you don't have to pay so much interest. This is predatory. Is this how things are done in Europe? It's insanely immoral.
Doesn't make any sense. Clarify with the lender.
Ahh I guess that's where things go wrong. I can't say how it works in Europe or whether that's common or not since I'm in NA and know more about how it works in North America but are you able to shop around to other banks for mortgages that do allow early payments against the principal? Is this early payment thing even common?
At the end of the day the bank still needs to make their money but you still need to get the best deal you possibly can so don't get pressured into taking a loan if you have time on your side.
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just fyi 40 year mortgages are coming to america
You just have to be that guy that mentions that, don't you?
40 years seems like it could be difficult to get to work. That's age 25 to 65 for example. Buy much later and you're into your 70s...
>“I once did a 30-year mortgage for a 97-year-old woman,” recalls Michael Becker, branch manager and loan originator at Sierra Pacific Mortgage in Lutherville, Maryland. “She was lucid, understood what she was doing and just wanted to help out a family member [by taking] some cash out of her home, and had the income to qualify and the equity in the home — she owned it free and clear — so she was approved.”
https://www.bankrate.com/mortgages/mortgages-for-seniors/#mortgage
as long as you can prove income, pass debt to loan ratios, etc age is not a factor that may be considered in America anyway
I'm thinking more on the home buyer's end. Just thinking about still having a mortgage into 70s when only 3x years old (unless they make extra payments).
I certainly hope I am not still making payments at that age, but I'm also not sure that its all that uncommon even now with 30 year mortgages and people refinancing or moving and starting over, etc
Welcome to how paying compound interest works.
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Yes it's normal. It is over an extremely long time period and you can reduce the amount considerably by paying early.
Your mortgage documents should have included an amortization schedule. Amortization turns a fixed interest rate and a fixed payment into a variable amount of principle and interest payment. Your amortization schedule should spell out who much goes to each for each payment you make. From there you should be able to tell how much interest you're paying. That would be the amount the bank is making off giving you a loan for your privilege of having the money now instead of saving up for some unknown number of years to have enough to buy a place.
Sure. That’s the exact way interest works.
The numbers you gave look self-contradictory to me, but assuming that your APR is around 6% and loan amount is 160400, in the first year you have 160400*0.06= 9,624 of interest. Divide it by 12 month and we have €802 in interest in a month. As you can see, vast majority of your €900 payment goes to interest and almost nothing to repay your loan in the first year. That's why it takes 38 years to repay it. As you payed back almost nothing in the first year, the situation would be almost the same in the next year. In theory you can have interest equal to your payment, your loan will be perpetual and you'll pay infinitely more for interest than loan itself.
If you want to pay less for interest, you need to shorten the term of the loan by either borrowing less, or by repaying more.
Disclosure: my calculations are "back of an envelope" and sloppy and probably not exactly how your bank calculates the interest. It's for demonstration purpose only.
Edit: typos.
>Loan of €250,000 €27,000 initial deposit Pay back ~€900 per month for 38 years
=RATE(38*12,-900,250000)*12
The interest rate is actually only 2.8622%. Putting any extra money into US Treasury is going to be more profitable than paying the loan. Until the rates change anyway.
Yeah. It seems that I was too sloppy when calculating APR %)
This is not a case of "welcome to adulthood", but rather "you don't know how good you have it".
It seems like this is ~3% interest rate, which is very low. Keep in mind that money becomes less valuable over time, so a €900 payment 30 years from now will be much less than a €900 payment today.
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Yep. With current interest rates and not paying extra payments to pay off early, people can likely pay over 100% of the mortgage loan amount in interest. Adulting is hard!
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Look up amortization tables or calculators. It's depressing and why shorter term mortgages and paying extra on principal is important. I've always made extra principal payments every month to drive that interest number down. Keep in mind that your currency devalues constantly as well. With the dollar it's typically been that it's value is cut in half about every 15 years or so, but your payment never changes so that works in your favor.
Using the PMT function in MS Excel, it looks like your interest rate on that €250,000 is less than 3% APR.
If you mean the loan is €250,000-27,000 = 223,000 then your interest rate is more like 3.65%.
Both are actually really good deals right now, but you have to understand how prepayment would work.
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That's pretty normal. They way I describe it is you're now paying rent on the money you used to buy the home.
A 38 year loan term is not ‘normal’, one thing to consider though is that in 38 years at an average inflation rate of 2 percent the money would be worth 2.12 times more. So even if you are paying 66% on top of the loan, inflation makes the final payments a LOT cheaper.
38 year loan? I'm surprised you arent paying a lot more than 160k in interest over that term...
Yeah it's a scam no Bank should not be able to make more than 5% profit off of a loan.
booztedmike t1_je9vosg wrote
The longer the loan goes, the more it costs you. You can save a lot of money down the road by paying extra towards the principal when you can.