What is Mortgage Interest? In the current real estate market, one of the most popular topics is the interest rate. Everywhere you turn, you read the exciting news that interest rates are at historically low levels — which is true. However, you may not be aware of just how mortgage interest is — and how much it costs you over the long haul.
Let’s say you’re buying a $400,000 house, and you put a 20 percent down payment, leaving the mortgage at $320,000. You find a loan at 3.5 percent, and so you sign the maximum ten-year loan, thinking that you’ll keep your payments as low as you can as long as possible. (Mortgage Interest Definition)
Interest paid on mortgage
Now let’s imagine that rates are still that low in ten years, and ten years after that, and so you’re able to keep that nice 3.5 percent interest rate. 3.5 percent doesn’t seem like a lot at all, but here’s how your mortgage plays out.
Amortized over 30 years, your mortgage consists of 360 payments of $1,436.94. If you multiply that by 360, you get a total of $517,299.48 that you will have paid out to borrow $320,000. When that house is paid for, it will have cost you $597,299.48 (including your $80,000 down payment.
Now if that sounds like a lot, what if rates were at their levels from a few years ago? Let’s say you faced a 6.5 percent interest rate for all thirty years. How would that work out for you? That monthly payment would be $2,022.62 — almost $600 more a month. You’d pay $728,142.36 in monthly installments, so the house would cost you a total of $808,142.36 including that down payment. You would have paid $408,142.36 in interest just to borrow $320,000.
Why do you end up paying so much over time? Interest adds up on loans — just like it does for investments. When you take out a conventional mortgage, you receive a lot of money from the bank — and you’re tying up that money for a long time. That’s the bank’s rationale for charging interest rates — they are in this to make money.
But what if you can save up a little more money to put down? If you can put $90,000 down instead of $80,000 for that 3.5 percent loan, you’ll end up about $6,000 ahead, because you’ll only pay out a total of $501,133.87, about $16,000 less than you would have with the lower down payment.
If your rate is 6.5 percent, you more than double your money, because you save just under $23,000 by making a $90,000 down payment instead of an $80,000 one.
Don’t let the big numbers in interest rates keep you from investing in the real estate market, though. After all, if you keep renting, you’ll never start building equity, and rent-to-own contracts turn out to be such a bad deal that Amansad Financial doesn’t even deal with them.
If you can’t get into a conventional mortgage right away, think about a private loan. You’ll pay higher interest rates for a year or two, but by then you can qualify for the lower rates that come with conventional financing if you improve your credit profile. The significant down payments that come with a private mortgage (15 percent to 25 or 30 percent, depending on the lender) mean that you’re financing less, and by the time renewal comes, you’ll be ready to get those lower bank rates.
If you’re interested in looking at the mortgage scenarios available to you, give one of our mortgage experts at Amansad Financial a call today!