## Sunday, October 13, 2019

### Mortgages are Weird

Mortgages are weird. You do this thing where you pay a lot of interest up front, and not much principle until later. Then you start thinking things like, "man, if I could just pay the principle, this thing would be paid off so much faster and I wouldn't owe as much interest!"

It's always been confusing to me too, but I think I've finally found a way of thinking about it that makes sense to me.

Imagine you have a bank account with \$100,000 that pays interest. You retire, and think, "I've probably got 10 years left in my life, so what I want to do is take out the same amount of money every month for the next 10 years." You don't want to die with money left in the account. That would be a waste! You also don't want to use it up too early, then how would you buy food? (Is this sounding morbid?)

At first you say, "I'll just divide \$100,000 over 12 months for the next 10 years." But you realize pretty quickly that because of the interest, you'll be left with a bunch of money left over at the end of 10 years!

If you just used the interest to pay yourself, your would never use all the money, of course. That's when you have a realization. However much you take out, it will mean less interest paid the next month. And so on, and so on as you take our more and more money.

So that's when it all comes together. You'll start by taking out money that is mostly interest, but a little bit of the original \$100,000 (if you didn't, you'd never use all the money)! But since you took out a little bit of the \$100,000, next month you wouldn't have as much interest, so you'd have to take out more of the original \$100,000. If you were really clever with math, you could make it work out perfectly so that you took out the same amount every month, the ratio of interest to the originally \$100,000 slowly changing over time, until you were being paid almost no interest and you had to take out the last of that original \$100,000.

This is a mortgage, except the roles are reversed between you and the bank.