Half-Life
What it is:
How it works/Example:
Let's say John Doe borrows $100,000 to buy a house. The interest rate is 4% with a 30-year mortgage. His monthly payment is $477.42, which includes some interest and some principal.
By building an amortization schedule, we can see that John will have to make 231 mortgage payments (roughly 19 years) before half of his loan is paid off.
Why it matters:
The half-life of any debt depends on the terms of the debt. In John's case, each payment includes interest and principal. In the early years of his loan, his payments are largely interest. As time passes, however, more of his payment is principal repayment. Accordingly, the half-life is not 50% of the time involved, but 50% of the principal involved. Note that John's interest rate and loan length influence the half-life tremendously.