Mortgage companies amortization practices

[Jody Sims]

I doubt anyone has questioned this in the forum before. I couldn't find the answer, so I'll pose it here.

How did society allow mortgage companies to evolve a strategy whereby mortgages all have front-loaded interest payments? Wouldn't having a balanced approach allow the loan to cost considerably less over the life of the loan, and possibly shorten the life of the loan as well?

I'm not saying I don't understand that that's just the way it is. I do. That doesn't mean I have to like it or wouldn't like to see how it's always been done changed.

[Bill Gulley]

What you are describing is a non-accrual loan, where interest is not applied toward all amounts outstanding, these are not customary loan terms and a lender that is in business would never agree to such terms lending cash, they might in lending based on equity, like seller financing. However, the interest rate a function of time over one year will be reduced and you'll have tax consequences if the yield falls below market rates. You'll get into issues of forgiveness of debt and imputed tax rates. 

There are also notes that have more than one principal part, where different amounts are blended into one loan. You may have an accelerated amortization on one part and a longer amortization on another part. You might buy a business operation with financing from the seller. You could have three parts, one for the real estate, one for the business operation and another part to payoff machinery or inventory. Explaining any further here would be like handing an Uzi to a child, so, I won't. Some are too creative for their own good.

Such are matters of advanced creative financing arrangements, very handy for estate planning, having more than one beneficiary, lender or partnerships with unequal interests.

This won't ever be accepted in mortgage financing as it would reek havoc on the entire financing system all the way through securities to investors buying the bonds that fund home loans. No out of the box thinking allowed there! :)