Compound interest sucks (unless you’re the benefactor)

Most normal people would go house hunting the old-fashioned way – they would find a house that suits their needs and place an offer on it. And that’s the way it ought to be. But with today’s volatile market and interest rates changing daily, the only affordable way to find a house is to first find a loan you can afford and then find a house that fits your loan. That’s bass-ackwards!

Let’s consider a typical home loan – $200,000 for 30 years fixed at 6.00% interest. This turns into a payment of $1199.10, which starts at roughly $200 principle and $999 interest. Here’s the first year’s amortization chart:
No: Payment: Principle: Interest: Balance
1 $1,199.10 $199.10 $1,000.00 $199,800.90
2 $1,199.10 $200.10 $999.00 $199,600.80
3 $1,199.10 $201.10 $998.00 $199,399.70
4 $1,199.10 $202.10 $997.00 $199,197.60
5 $1,199.10 $203.11 $995.99 $198,994.49
6 $1,199.10 $204.13 $994.97 $198,790.36
7 $1,199.10 $205.15 $993.95 $198,585.21
8 $1,199.10 $206.17 $992.93 $198,379.04
9 $1,199.10 $207.20 $991.90 $198,171.84
10 $1,199.10 $208.24 $990.86 $197,963.60
11 $1,199.10 $209.28 $989.82 $197,754.32
12 $1,199.10 $210.33 $988.77 $197,543.99

And these payments go on and on for 30 years…….

Now here’s something to consider – Let’s say you win the lottery after paying on your mortgage for 1 year. You pay off the remaining principle of the loan and save paying the interest. But the 12 monthly payments you had previously made were calculated on the assumption that the loan would go full-term. But since you paid it off early, it didn’t.

Here’s the reason compound interest is an evil invention of man – the ONLY reason the payments are what they are is because of compound interest and how it adds up over time. If this same loan was calculated using simple interest, the payments would start at $1555.56, which is roughly $555.56 principle and $1000 interest. Even though it’s a higher monthly payment, you are paying off the principle amount faster. Once a year, on the loan’s anniversary, the interest amount is re-calculated based on the remaining balance. Here’s the entire amortization, which shows this same $200,000 loan being paid off in 18 3/4 years (instead of 30 years!!):
No: Payment: Principle: Interest: Balance
$200,000.00
Year 1
1 $1,555.56 $555.56 $1,000.00 $199,444.44
2 $1,555.56 $555.56 $1,000.00 $198,888.88
3 $1,555.56 $555.56 $1,000.00 $198,333.32
4 $1,555.56 $555.56 $1,000.00 $197,777.76
5 $1,555.56 $555.56 $1,000.00 $197,222.20
6 $1,555.56 $555.56 $1,000.00 $196,666.64
7 $1,555.56 $555.56 $1,000.00 $196,111.08
8 $1,555.56 $555.56 $1,000.00 $195,555.52
9 $1,555.56 $555.56 $1,000.00 $194,999.96
10 $1,555.56 $555.56 $1,000.00 $194,444.40
11 $1,555.56 $555.56 $1,000.00 $193,888.84
12 $1,555.56 $555.56 $1,000.00 $193,333.28
Year 2
13 $1,555.56 $588.89 $966.67 $192,744.39
14 $1,555.56 $588.89 $966.67 $192,155.50
15 $1,555.56 $588.89 $966.67 $191,566.61
16 $1,555.56 $588.89 $966.67 $190,977.72
17 $1,555.56 $588.89 $966.67 $190,388.83
18 $1,555.56 $588.89 $966.67 $189,799.94
19 $1,555.56 $588.89 $966.67 $189,211.05
20 $1,555.56 $588.89 $966.67 $188,622.16
21 $1,555.56 $588.89 $966.67 $188,033.27
22 $1,555.56 $588.89 $966.67 $187,444.38
23 $1,555.56 $588.89 $966.67 $186,855.49
24 $1,555.56 $588.89 $966.67 $186,266.60
Year 3
25 $1,555.56 $622.39 $933.17 $185,644.21
26 $1,555.56 $622.39 $933.17 $185,021.82
27 $1,555.56 $622.39 $933.17 $184,399.43
28 $1,555.56 $622.39 $933.17 $183,777.04
29 $1,555.56 $622.39 $933.17 $183,154.65
30 $1,555.56 $622.39 $933.17 $182,532.26
31 $1,555.56 $622.39 $933.17 $181,909.87
32 $1,555.56 $622.39 $933.17 $181,287.48
33 $1,555.56 $622.39 $933.17 $180,665.09
34 $1,555.56 $622.39 $933.17 $180,042.70
35 $1,555.56 $622.39 $933.17 $179,420.31
36 $1,555.56 $622.39 $933.17 $178,797.92
Year 4
37 $1,555.56 $656.06 $899.50 $178,141.86
38 $1,555.56 $656.06 $899.50 $177,485.80
39 $1,555.56 $656.06 $899.50 $176,829.74
40 $1,555.56 $656.06 $899.50 $176,173.68
41 $1,555.56 $656.06 $899.50 $175,517.62
42 $1,555.56 $656.06 $899.50 $174,861.56
43 $1,555.56 $656.06 $899.50 $174,205.50
44 $1,555.56 $656.06 $899.50 $173,549.44
45 $1,555.56 $656.06 $899.50 $172,893.38
46 $1,555.56 $656.06 $899.50 $172,237.32
47 $1,555.56 $656.06 $899.50 $171,581.26
48 $1,555.56 $656.06 $899.50 $170,925.20
Year 5
49 $1,555.56 $689.90 $865.66 $170,235.30
50 $1,555.56 $689.90 $865.66 $169,545.40
51 $1,555.56 $689.90 $865.66 $168,855.50
52 $1,555.56 $689.90 $865.66 $168,165.60
53 $1,555.56 $689.90 $865.66 $167,475.70
54 $1,555.56 $689.90 $865.66 $166,785.80
55 $1,555.56 $689.90 $865.66 $166,095.90
56 $1,555.56 $689.90 $865.66 $165,406.00
57 $1,555.56 $689.90 $865.66 $164,716.10
58 $1,555.56 $689.90 $865.66 $164,026.20
59 $1,555.56 $689.90 $865.66 $163,336.30
60 $1,555.56 $689.90 $865.66 $162,646.40
Year 6
61 $1,555.56 $723.90 $831.66 $161,922.50
62 $1,555.56 $723.90 $831.66 $161,198.60
63 $1,555.56 $723.90 $831.66 $160,474.70
64 $1,555.56 $723.90 $831.66 $159,750.80
65 $1,555.56 $723.90 $831.66 $159,026.90
66 $1,555.56 $723.90 $831.66 $158,303.00
67 $1,555.56 $723.90 $831.66 $157,579.10
68 $1,555.56 $723.90 $831.66 $156,855.20
69 $1,555.56 $723.90 $831.66 $156,131.30
70 $1,555.56 $723.90 $831.66 $155,407.40
71 $1,555.56 $723.90 $831.66 $154,683.50
72 $1,555.56 $723.90 $831.66 $153,959.60
Year 7
73 $1,555.56 $785.76 $769.80 $153,173.84
74 $1,555.56 $785.76 $769.80 $152,388.08
75 $1,555.56 $785.76 $769.80 $151,602.32
76 $1,555.56 $785.76 $769.80 $150,816.56
77 $1,555.56 $785.76 $769.80 $150,030.80
78 $1,555.56 $785.76 $769.80 $149,245.04
79 $1,555.56 $785.76 $769.80 $148,459.28
80 $1,555.56 $785.76 $769.80 $147,673.52
81 $1,555.56 $785.76 $769.80 $146,887.76
82 $1,555.56 $785.76 $769.80 $146,102.00
83 $1,555.56 $785.76 $769.80 $145,316.24
84 $1,555.56 $785.76 $769.80 $144,530.48
Year 8
85 $1,555.56 $832.91 $722.65 $143,697.57
86 $1,555.56 $832.91 $722.65 $142,864.66
87 $1,555.56 $832.91 $722.65 $142,031.75
88 $1,555.56 $832.91 $722.65 $141,198.84
89 $1,555.56 $832.91 $722.65 $140,365.93
90 $1,555.56 $832.91 $722.65 $139,533.02
91 $1,555.56 $832.91 $722.65 $138,700.11
92 $1,555.56 $832.91 $722.65 $137,867.20
93 $1,555.56 $832.91 $722.65 $137,034.29
94 $1,555.56 $832.91 $722.65 $136,201.38
95 $1,555.56 $832.91 $722.65 $135,368.47
96 $1,555.56 $832.91 $722.65 $134,535.56
Year 9
97 $1,555.56 $882.88 $672.68 $133,652.68
98 $1,555.56 $882.88 $672.68 $132,769.80
99 $1,555.56 $882.88 $672.68 $131,886.92
100 $1,555.56 $882.88 $672.68 $131,004.04
101 $1,555.56 $882.88 $672.68 $130,121.16
102 $1,555.56 $882.88 $672.68 $129,238.28
103 $1,555.56 $882.88 $672.68 $128,355.40
104 $1,555.56 $882.88 $672.68 $127,472.52
105 $1,555.56 $882.88 $672.68 $126,589.64
106 $1,555.56 $882.88 $672.68 $125,706.76
107 $1,555.56 $882.88 $672.68 $124,823.88
108 $1,555.56 $882.88 $672.68 $123,941.00
Year 10
109 $1,555.56 $935.86 $619.70 $123,005.14
110 $1,555.56 $935.86 $619.70 $122,069.28
111 $1,555.56 $935.86 $619.70 $121,133.42
112 $1,555.56 $935.86 $619.70 $120,197.56
113 $1,555.56 $935.86 $619.70 $119,261.70
114 $1,555.56 $935.86 $619.70 $118,325.84
115 $1,555.56 $935.86 $619.70 $117,389.98
116 $1,555.56 $935.86 $619.70 $116,454.12
117 $1,555.56 $935.86 $619.70 $115,518.26
118 $1,555.56 $935.86 $619.70 $114,582.40
119 $1,555.56 $935.86 $619.70 $113,646.54
120 $1,555.56 $935.86 $619.70 $112,710.68
Year 11
121 $1,555.56 $992.01 $563.55 $111,718.67
122 $1,555.56 $992.01 $563.55 $110,726.66
123 $1,555.56 $992.01 $563.55 $109,734.65
124 $1,555.56 $992.01 $563.55 $108,742.64
125 $1,555.56 $992.01 $563.55 $107,750.63
126 $1,555.56 $992.01 $563.55 $106,758.62
127 $1,555.56 $992.01 $563.55 $105,766.61
128 $1,555.56 $992.01 $563.55 $104,774.60
129 $1,555.56 $992.01 $563.55 $103,782.59
130 $1,555.56 $992.01 $563.55 $102,790.58
131 $1,555.56 $992.01 $563.55 $101,798.57
132 $1,555.56 $992.01 $563.55 $100,806.56
Year 12
133 $1,555.56 $1,051.53 $504.03 $99,755.03
134 $1,555.56 $1,051.53 $504.03 $98,703.50
135 $1,555.56 $1,051.53 $504.03 $97,651.97
136 $1,555.56 $1,051.53 $504.03 $96,600.44
137 $1,555.56 $1,051.53 $504.03 $95,548.91
138 $1,555.56 $1,051.53 $504.03 $94,497.38
139 $1,555.56 $1,051.53 $504.03 $93,445.85
140 $1,555.56 $1,051.53 $504.03 $92,394.32
141 $1,555.56 $1,051.53 $504.03 $91,342.79
142 $1,555.56 $1,051.53 $504.03 $90,291.26
143 $1,555.56 $1,051.53 $504.03 $89,239.73
144 $1,555.56 $1,051.53 $504.03 $88,188.20
Year 13
145 $1,555.56 $1,114.62 $440.94 $87,073.58
146 $1,555.56 $1,114.62 $440.94 $85,958.96
147 $1,555.56 $1,114.62 $440.94 $84,844.34
148 $1,555.56 $1,114.62 $440.94 $83,729.72
149 $1,555.56 $1,114.62 $440.94 $82,615.10
150 $1,555.56 $1,114.62 $440.94 $81,500.48
151 $1,555.56 $1,114.62 $440.94 $80,385.86
152 $1,555.56 $1,114.62 $440.94 $79,271.24
153 $1,555.56 $1,114.62 $440.94 $78,156.62
154 $1,555.56 $1,114.62 $440.94 $77,042.00
155 $1,555.56 $1,114.62 $440.94 $75,927.38
156 $1,555.56 $1,114.62 $440.94 $74,812.76
Year 14
157 $1,555.56 $1,181.50 $374.06 $73,631.26
158 $1,555.56 $1,181.50 $374.06 $72,449.76
159 $1,555.56 $1,181.50 $374.06 $71,268.26
160 $1,555.56 $1,181.50 $374.06 $70,086.76
161 $1,555.56 $1,181.50 $374.06 $68,905.26
162 $1,555.56 $1,181.50 $374.06 $67,723.76
163 $1,555.56 $1,181.50 $374.06 $66,542.26
164 $1,555.56 $1,181.50 $374.06 $65,360.76
165 $1,555.56 $1,181.50 $374.06 $64,179.26
166 $1,555.56 $1,181.50 $374.06 $62,997.76
167 $1,555.56 $1,181.50 $374.06 $61,816.26
168 $1,555.56 $1,181.50 $374.06 $60,634.76
Year 15
169 $1,555.56 $1,252.39 $303.17 $59,382.37
170 $1,555.56 $1,252.39 $303.17 $58,129.98
171 $1,555.56 $1,252.39 $303.17 $56,877.59
172 $1,555.56 $1,252.39 $303.17 $55,625.20
173 $1,555.56 $1,252.39 $303.17 $54,372.81
174 $1,555.56 $1,252.39 $303.17 $53,120.42
175 $1,555.56 $1,252.39 $303.17 $51,868.03
176 $1,555.56 $1,252.39 $303.17 $50,615.64
177 $1,555.56 $1,252.39 $303.17 $49,363.25
178 $1,555.56 $1,252.39 $303.17 $48,110.86
179 $1,555.56 $1,252.39 $303.17 $46,858.47
180 $1,555.56 $1,252.39 $303.17 $45,606.08
Year 16
181 $1,555.56 $1,327.53 $228.03 $44,278.55
182 $1,555.56 $1,327.53 $228.03 $42,951.02
183 $1,555.56 $1,327.53 $228.03 $41,623.49
184 $1,555.56 $1,327.53 $228.03 $40,295.96
185 $1,555.56 $1,327.53 $228.03 $38,968.43
186 $1,555.56 $1,327.53 $228.03 $37,640.90
187 $1,555.56 $1,327.53 $228.03 $36,313.37
188 $1,555.56 $1,327.53 $228.03 $34,985.84
189 $1,555.56 $1,327.53 $228.03 $33,658.31
190 $1,555.56 $1,327.53 $228.03 $32,330.78
191 $1,555.56 $1,327.53 $228.03 $31,003.25
192 $1,555.56 $1,327.53 $228.03 $29,675.72
Year 17
193 $1,555.56 $1,407.18 $148.38 $28,268.54
194 $1,555.56 $1,407.18 $148.38 $26,861.36
195 $1,555.56 $1,407.18 $148.38 $25,454.18
196 $1,555.56 $1,407.18 $148.38 $24,047.00
197 $1,555.56 $1,407.18 $148.38 $22,639.82
198 $1,555.56 $1,407.18 $148.38 $21,232.64
199 $1,555.56 $1,407.18 $148.38 $19,825.46
200 $1,555.56 $1,407.18 $148.38 $18,418.28
201 $1,555.56 $1,407.18 $148.38 $17,011.10
202 $1,555.56 $1,407.18 $148.38 $15,603.92
203 $1,555.56 $1,407.18 $148.38 $14,196.74
204 $1,555.56 $1,407.18 $148.38 $12,789.56
Year 18
205 $1,555.56 $1,491.61 $63.95 $11,297.95
206 $1,555.56 $1,491.61 $63.95 $9,806.34
207 $1,555.56 $1,491.61 $63.95 $8,314.73
208 $1,555.56 $1,491.61 $63.95 $6,823.12
209 $1,555.56 $1,491.61 $63.95 $5,331.51
210 $1,555.56 $1,491.61 $63.95 $3,839.90
211 $1,555.56 $1,491.61 $63.95 $2,348.29
212 $1,555.56 $1,491.61 $63.95 $856.68
213 $856.68 $792.73 $63.95 $0.00

And the loan could be paid off even sooner if the interest and remaining balance was calculated more exacting than just once a year.

About hemibill

blah, blah, blarg
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2 Responses to Compound interest sucks (unless you’re the benefactor)

  1. Pingback: Money is NOT a product | Hemibill's Blog

  2. Pingback: Reality is what we make of it | Hemibill's Blog

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