Time Value of Money

The basis of the Time Value of Money is that money today is worth more than money tomorrow or next year. Would you sooner me give you $100 today or $100 next year. Even if you were absolutely sure that you would collect next year, the answer must be today. The price that I would pay you to wait a year for your money is called interest. 

A mortgage typically involves giving a large amount of money to the borrower today and receiving it back in monthly payments over a period of time. Conventional home loan can last 30 years. However the average 30 year mortgage is paid off in 7 years. Why? People move, die, get divorced and refinance at a lower rate. Or even lose their property in foreclosure.

According to the Mortgage Bankers Association the average foreclosure rate on conventional mortgages is about 0.6%.(3rd quarter 2000)  It was a little higher on low money down FHA mortgages, about 1.6%.

See also our article on why interest rates move.

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