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Updated over 5 years ago,
Conventional Loans don't make sense to me because...
Ok so I'm reading a lot about loans and trying to figure them out, a couple things I can't figure out for the life of me, was hoping one of y'all could help me understand!
1. Why would a bank loan out money at a 4% interest rate when they could put that money in the stock market and make 10% to 12%? Do the interest rates they get from mortgage payments work differently than interest rates from the stock market (i.e. are they compounded more often or something?)
2. Why does Amortization matter when it comes to the percent interest and percent principal. I understand that at the beginning of your payments you pay mostly interest, and it gradually shifts where towards the end you're paying mostly principal, I just don't understand why it matters. For example, if you take out a $100,000 loan at 5% over 30 years, you're going to have to pay a total of $193,255 (figured this out using an online calculator). Whether I'm paying interest or principal on my payments at the end of the day I still owe the bank a total of $193,255, so why does it matter what "order" the principal and interest are paid off?
3. In most of the articles and books I'm reading on buying rental properties, they use Cash on Cash ROI to calculate if something is a good deal, and typically they compare it to the stock market (makes sense, if I can get a better ROI from the stock market I'd rather put my money there). I don't understand why everyone uses CoCROI and doesn't include loan paydown as part of the ROI. The equity you're building up is still money you're building up, even though it isn't immediate cash on hand, just like if you put money into a 401K, you'd still count the interest you're making even if you can't take it out right away. So wouldn't it make more sense to include loan paydown as part of your ROI calculations so it'd be an apples to apples comparison to the stock market?
Anyway, I'd really appreciate some help on this if you have any answers! I know there are a ton of people much smarter than me on these forums. Thanks!
-Zach