After 15 years, Jack and Jill, and Dick and Jane, have each paid $315,871.76 in interest, plus $115,804.62 in principle. So half way through their loans they each still owe:
amount still owed
on their $400,000 houses. By year 15, Jack and Jill, and Dick and Jane, have paid nearly 80% of the original purchase price in interest alone, and still owe 71% as unpaid balance.
Miles and Holiday have, of course, paid off their house. They paid a total of $103,788.46 in interest (about 52% of the purchase price of $200,000). But they lived in a more modest house.
So after 15 years Miles and Holiday sell their house and buy a $500,000 house in an even swankier neighborhood. Miles and Holiday know that having the most expensive house in a neighborhood makes it harder to sell—so their first house is easier to sell than the house that Jack and Jill bought. For Miles and Holiday's second house they buy at a little less than the median price in a new neighborhood.
Miles and Holiday take the $200,000 equity from the house they own, minus about 8% for realtor and transaction fees ($16,000) and use the remaining $184,000 as a down payment. They then finance the remaining $316,000 ($500K - $184K = $316K) over 15 years at 6%. (Non-inflation-adjusted, that requires monthly payments of $2,666.59. But that's fifteen years down the road, and is equivalent to their current monthly payment assuming annual inflation of 3.1%; see Inflation and appreciation).
At the end of another 15 years, Jack and Jill, and Dick and Jane, and Miles and Holiday each own their own homes.
Jack and Jill paid $463,352.76 in interest for a $400,000 house for a total of $863,352.76. Dick and Jane paid the same amount. That's a lot of money to pay for a $400,000 house which is now at least 30 years old.
Miles and Holiday paid $163,985.76 in interest on their second loan of $316,000 for a total of $479,985.76. They now own a half-million dollar home. In all, Miles and Holiday paid $303,788.46 for their first house plus $479,985.76 for their second house for a total of $783,774.22. That's almost $80,000 less than J&J and D&J for a house that's worth $100,000 more, and possibly 15 years newer. Plus, in the 30 years that all families had mortgages, Miles and Holiday had many more stress-free years of having substantial home equity. Clearly, Miles and Holiday's decision to buy small, and finance multiple shorter loans, left them much better off in the long run. And for the first 15 years—when money is tight—even their monthly payment was lower.
Miles and Holiday used financial levers to avoid voluntary indentured servitude.
Everyone paid the same interest rate (6%). Interest was calculated the same "fair" way for everyone—simply pay interest each month on what you owe. No funny stuff. Everyone made mortgage payments for the same 30 years. But Miles and Holiday got a lot more for a lot less via a safer route (more home equity, acquired quicker, for longer periods of time).
The key is in observing that the less you pay each month, the more you approach the interest-only state of indentured servitude. Unfortunately, this is exactly what minimum payments on a 30 year loan does to you.
When buying a house, it is common to figure the largest amount we can afford each month (thereby immediately jeopardizing Tip Number One), on the biggest house we can get on that monthly payment. By stretching out the number of payments, we can borrow more. So quickly people agree to 30 year mortgages—and of course the lenders are all too happy to oblige. Since folks are max-ed out, they cannot make extra payments and have little wriggle room if something happens such as losing a job or incurring high medical expenses.