Why?
Not being snarky, seriously, why?
For the ease of math, lets say you took out $150000 loan at 4 percent over 30 year (360 months)
That would create a lending fee (interest) of $106244 over the life of the loan.
106244 / 360 = $295
Principal payments would be 150000 / 360 = $416.
For total payment each of month of an equal portion of the total loan principal and the interest of $711.
This is my understanding of a simple, non-compound interest mortgage.
Yes, that is how simple interest works. But simple interest ignores
alternative uses of money. Money held for a long time is more precious than money held for a short time. That is, suppose I'm a friend and I let you "hold" $10,000 for a year. You use it to make some repairs on your business and pay me back next year from your profits (0% interest because we're friends). But now suppose you ask me to "hold" $10,000 for 10 years. Ouch. That's a long time to "hold" $10,000. We might be friends, but we're not
family. So yeah, you're going to have to pay me if you want to borrow $10k for that length of time. But why? Why am I fine with letting you hold $10k for a year, but not 10 years?? Because the value of $10k over 10 years is significantly more than $10k, that is, the future-value of $10k is the expected market return (say 3%) that I could earn on that $10k, compounded over 10 years. So if I let you hold $10k for a year, that costs me $300. But hey, we're friends, no problem. But if I let you hold $10k over 10 years, that works out to $3,048, which is a chunk of change. I would have to forego all that potential gain from market investment to allow you to hold the $10k for 10 years. So you're going to have to pay me for it unless we're family or something.
If you take this same idea and "finely chop it up" for each dollar, with interest compounded each day, for each duration (1 year, 2 years, 3 years, etc.), you end up with compound interest. It's a simple formula:
F = P(1+r)^y
F means "the Future value", P means "the Principal or Present-value", r is the annual interest rate (0.05 for 5%), and y is the number of years. We can "chop up" time as finely as we want using the following formula:
F = P(1+r/n)^(n*y)
The n is the number of divisions of a year. So, if we want to calculate monthly (12 equal months), we set n=12. For daily, we set n=365. This formula works for any division of time, no matter how fine. So, we can calculate the value of P at interest-rate r for every second of time if we want. The reason this matters is that I (as a creditor) want to maximize F, the total future value of money. So, I want to accept the best offer from borrowers, meaning, I want to accept the P, r and y that maximize F. Mainly, it's r that we're focusing on, but really all the variables can matter, especially when you take into account the dates at which a loan begins. So, future loans at higher interest rates can be preferable to present loans at lower interest rates. It's not just r I'm maximizing, it's F that I'm maximizing. This is the underlying logic of compounding. It's the same in the stock market... I want to invest to maximize F, which means I want the best r and y for my P.
Now, other than the banksters wanting their cut first, so as to make a maximum profit in the event of foreclosure or default, why is it mathematically required for interest to be paid up front, instead of equally paid along with principal every month, thus building equity quicker for the owner of the property?
It is not mathematically impossible to do what you're saying, it's just that you have to calculate a
simple interest loan that "happens" to have an interest rate that matches what a compounding interest loan would work out to. Take my $10,000 over 10 years at 3% interest example above. With simple interest, this is just $10,000 x 0.03 = $300 and then $300 x 10 = $3,000. So, the total interest works out to $3,000 with simple interest. But if we used a compound 3% interest, it would work out to $3,048, so the equivalent simple-interest is actually 3.048% in this case, not 3%. That 0.048% difference can be much larger depending on the exact settings of the variables, so it's not negligible. For this reason, you can't just blindly treat simple and compound interest the same. You must first calculate the loan on the basis of compound interest, then convert that into a simple-interest rate, re-calculate the loan, and then you have your total interest, which you can then schedule over the life of the loan. That is POSSIBLE, but it's just not how our infinite-greed financial system is set up. You exist to pay rent and interest, not to make a living or become a self-sufficient individual. Eat your bugs purchased on your 21% credit-card and be happy, comrade. Don't engage in badthink.
Nobody else gets this courtesy. If I purchased $150000 in 30 year CDs, let's say, and cashed them in before maturity, I would not get front loaded interest paid to me.
The reason is that the interest rate for different maturities is different, so when you cash out early, you're downgrading to the lower maturity, so the rate goes down. But the calculation of interest for a given rate (which determines the total you will earn) is indeed front-loaded in the same way. This is not where the injustice of the system lies. The injustice lies in how debt can compound indefinitely if you fall behind, so every loan is actually an infinite debt. That's a ONE WAY setup. It does not go the other way for investments. Investments are only ever finite, but debts are all infinite until paid. That's where the injustice is.
