The strange title of this column hopefully will help you to understand the concept of different loans to solve different situations that arise in the mortgage industry. For years borrowers assumed that a mortgage was to finance a home purchase and it didn't matter what type of loan they took. It is now fairly evident that a mortgage loan is a terrific financial planning tool and, in most cases the bedrock of the borrowers financial well being.

I am going to take various loans and build a chart to demonstrate how mortgage loans work ,and more specifically how the payment is distributed between principal and interest. The more that goes to the principal the lower the balance and the greater the equity in the house.

                                  Monthly Payment        Principal       Interest  

30 year fixed   6.25%         $1,847                 $   285         $1,562     
  
20 year fixed   6.125%       $2,171                 $   640         $ 1,531     
  
15 year fixed   5.875%       $2,511                 $1,042         $ 1,489   

The biggest surprise to borrowers when looking at a chart, as the one above, is interest paid is greatest on the longer loans. This is because the interest rate is higher and actually has nothing to do with the amortization. What they should be surprised at is the amount of the payment going to the principal, not the interest, as the amortization gets shorter. I have been told by many borrowers they didn't want to be "house poor" by taking a 15 year loan over a 30 year loan. In reality it is just the opposite

                                               Monthly Payment           Total Payment
  
                     30 year fixed          $1,847                             $664,920
  
                     20 year fixed          $2,170                             $520,800
  
                     15 year fixed          $2,511                             $451,980    Continued...