Question: We went to see a lender and it was a terrifying experience. The lender says we can afford to borrow $225,000 at 4 percent interest. Our monthly payment will be $1,074.18 for principal and interest.

All of this sounded great until we found out that the total bill for our financing will be $386,705! Where does this number come from and doesn’t it make more sense to simply rent?

Answer: The odds that you will pay $387,000 for your mortgage are pretty much zero. It could happen, which is why the lender provided the figure, but in the real world, it’s implausible.

Rent is something we can all understand. For the use of someone else’s property, you pay a monthly fee. If you rent an apartment for 30 years at $1,075 per month the total cost will be the very same $387,000 (360 months x $1,075).

In practice, you will never pay $1,075 per month for an apartment because the landlord will increase the rent over time. Just think about rental rates five or ten years ago – same property and most-likely a lower rent.

A mortgage is the same idea. You have the use of someone else’s property. Instead of an apartment, the lender’s “property” is the money provided to you at closing.

In basic terms, interest is the “rent” you pay for use of the lender’s money. For a $225,000 mortgage at 4 percent, the interest cost (“rent”) over 30 years is $161,705. Combine $225,000 in principal with $161,705 in interest and the total is $386,705.

While rent and the payment of interest are parallel ideas, they are not the same – especially for savvy borrowers. If you finance with a fixed-rate mortgage, the cost for principal and interest never changes. You have locked in a big part of your future shelter costs. While the cost of taxes and insurance may go up, a fixed-rate mortgage gives borrowers a hedge against future rate hikes and higher monthly expenses.

Unlike a landlord with an apartment rent, lenders cannot increase the interest cost of fixed-rate mortgages. This is one of the very few cases in the world of finance where borrowers have leverage. While your fixed-rate mortgage is a wondrous financial vehicle for borrowers, lenders would really be happier if borrowers took out adjustable-rate mortgages (ARMs), financing where the interest rate can go up.

Why do lenders offer fixed-rate mortgages (FRMs) if they prefer ARMs? The answer is that they’re not worried about loans being outstanding for 30 years – and neither should you. According to Freddie Mac, the typical mortgage in the third quarter was outstanding just 6.1 years before being refinanced or paid off as the result of a home sale.

When we look at a mortgage, we see the amount borrowed, the interest rate, and the monthly payment. With a fixed-rate mortgage the TOTAL monthly payment for principal and interest never changes. However, each month the cost of interest declines because some of the principal is paid down.

For instance, look at the loan’s amortization statement. In month one the total payment is $1,074.18. Of this amount, $750 is interest and $324.18 is principal. A year later the monthly payment of $1,074.18 is unchanged, but now the interest cost in month 13 is $736.79 while the principal payment is $337.39. Slowly over 30 years the mortgage will be completely paid off, it’s a “self-amortizing” debt.

If you compare mortgage payments with rent, you can see a very important difference. When you pay rent the money is gone since it goes to the landlord. That’s not evil or unfair because you have had the use of the landlord’s property.

With a mortgage the situation is different. As you pay down the debt you owe less. If the value of the property does not change, or if it goes up, your wealth increases. In the case of the $225,000 mortgage at 4 percent at the end of the first year the debt will be reduced by $3,962. At the end of two years the debt will be lower by $8,086. Etc. If you sell you will owe less to the lender and that can mean a larger check for you at closing.

Because of tax reform the ability to deduct mortgage interest will be continued, however many taxpayers will elect to take the standard deduction and not itemize. The practical effect of tax reform will be to make use of the mortgage interest and property tax deductions unrealistic for many owners.

The tax benefits of rentals and owner-occupied homes will now be the same for many taxpayers. What won’t be the same is the ability to shelter costs with a fixed-rate mortgage, the gradual reduction of debt which can make us richer, and the potential for owner profits if home values rise.