Instead of structuring home loans so that you can never get out from them with compound interest, why not do home loans more like a car loan? Simple interest would almost guarantee far fewer defaults on loans. It would mean more money at the end of the month for home owners to go out and spend in the economy. It would mean the banks would have fewer problems with "risky customers". Sure, any loan comes with risk, but if you can improve the odds that someone will actually be able to pay it back then the banks would get a lot happier customers. It's not like the banks won't still be making money, even at 10% simple interest the bank will be pulling in a good chunk of change from each loan. There are cars on the road now that cost more than my house did but they still give simple interest loans for those cars. Why not my house? It's not like my house is going to be run off the side of a bridge. Even if a house totally burns to the ground, there is still the land it sits on. Once you can get people to afford their own houses, it has the potential of putting fewer people in public housing and relying on the government. With each new homeowner comes home improvement loans (another source of revenue for banks).
I challenge anyone in the banking industry to give me one reason why Simple Interest home loans are impossible. The only answer that is unacceptible is "banks won't make as much money".
(I'd been chewing on this for many years even before I got my own mortgage. )
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To expand a bit... if I can pay off my $20,000 car in 5 years, why does it take 6 times as long to pay off my house that costs less than 5 times as much? And the monthly mortgage payment (not counting insurance & taxes in escrow) is usually 2 to 3 times as much as my car payment. It doesn't make sense!
I don't understand this distinction between "simple interest" and what is used for morgates. If you pay off your interest on a regular basis, the compounding should not be an issue. It sounds like you are just asking banks to lower their interest rates.
Perhaps interest rates are too high, and it is too hard to buy a house, but I think the problems are much deeper than the interest rates charged by banks. There are reasons that banks can get away with charging such high rates. I attribute it to the laws surrounding money, banking, and land ownership.
Simple interest mortgages work well. The real problem is when the banks or lending institutions apply your payment. A 'real' simple interest mortgage will cut years off of your mortgage. People should be thinking about time and debt, not about the interest rate. How fast is your principle reducing. The interest rate helps determine your payment amount but does not have any reflection on how fast your principle is going down. A lender that applies the payment, for simple interest, when they receive your payment will reduce your principle balance accordingly and your next payment will be based on the lower principle amount.
I just wrote a whole long explanation about Simple Interest and the Why Not site must have timed out, because it didn't post and I don't have a copy.
My short answer is I agree mortgage interest is too high, but opting for simple inte3rest is not the way to solve it. That would usually cost a few hundred dollars more.
Beat the bastards at their own game by following the do-it-yourself mortgage reduction techniques in Let Your Mortgage Make You Rich!
(Sorry the whole dialogue blew out. You made some good points.)
They are not impossible. Primerica Financial Services has a loan called the S.M.A.R.T. loan that is set up with simple interest and biweekly payments.
IMPORTANT FACT: Interest rate is important but how the interest is applied is MORE important. Simple interest can reduce the length of the loan by 10 years or more.
If I bought a $100,000 RV at %7 IR and paid $1000/month it would pay off in about 12 years. But if I bought a $100,000 house at %7IR and paid $1000/month it would pay off in 30 years!?!! Thats 18 years difference just on how the interest is applied.
Anyone who tells you there's no difference is LYING!!!