Posts Tagged ‘principal’

Easy to Fool

Posted: July 6, 2017 in Thought for the Day
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“The first principal is that you must not fool yourself, and you are the easiest person to fool.” -Richard Feynman

Borrowing money is no different than renting money.  A bank loans its assets and in return receives a payment of principal and interest.  The wealth of the bank increases, while the borrower has transferred that opportunity to the bank.

The good:  A person can save thousands of dollars over the long haul (if the home is kept for the long haul).  The bad:  There are many miscellaneous fees and finance costs associated with the refinance; lower home value, in relation to limited equity level, may lead to the necessity of paying private mortgage insurance (PMI).  The ugly:  mortgage interest is front loaded up to 90% once again, lowering the amount of the payment going toward principal.  This refinancing, coupled with the average American moving every 5-7 years, keeps homeowners spending the majority of their money on interest instead of building equity.

Two families purchase personal vehicles over 40 years.  Both purchase 12 vehicles for $20,000 each, at 6% interest.  Monthly payments are equal.  One family, using traditional financing, pays $38,000 in interest and $240,000 in principal to the finance company. The other family, using their own personal system, recaptures both totals back into their own pocket.  That is a swing of over $500,000.