Posted by Chris O'Sullivan
Interest on home mortgages is commonly "front-end" loaded, meaning lenders are making what some may consider unfair amounts of cash on your interest payments. Often times it may take 20 years to pay off only half of the principal on a 30 year mortgage. Front-end loads are structured in a way that requires the mortgage holder to pay off the interest first before chipping away at the principle.
If large interest payments in the early years really do generate excess profits for lenders, you would think that they would prefer 30-year to 15-year mortgages, because interest payments on the 15 decline much more rapidly. You would also suspect they should charge higher rates on 15s. However, they actually charge lower rates on 15s.
The way that lenders price loans is just the opposite of what we would expect if interest was front-end loaded. Lenders actually prefer shorter-term mortgages because their money turns over faster, which reduces their exposure to rising interest rates, and the more rapid pay-down of the balance reduces the risk of loss from default. This show why it is important to know the fine print in any contract that you sign.
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