Interest Rate

Mortgage Amortization

by Jim Ludes on February 10, 2014

in Buyers

Sample amortization table ($200,000 purchase with 20% down and a 4.25% interest rate)

Something to consider when purchasing a house is how much you will actually pay for it. This is explained to you at closing by your legal council, but if you read it here first, you will dull the shock factor. Amortization shows the percentage of your payment that is going towards interest and the part that is going toward principal (the amount you borrow). Let’s use round(ish) numbers on a pretend house. $200,000 for a place that you put 20% down on at a nice interest rate of 4.25%. Not concerning ourselves with taxes, insurance or association fees that would leave your monthly payment at $787.10. What we’re looking at though is how much of that payment is PAYING OFF your loan and how much is going to interest.

What you see in the amortization table (a full version available here) is that you will be paying off $220.44 of the loan in the first month (while paying $566.67 in interest for the privilege of being loaned the money). In the final payment, as logic would have it, you will pay $781.55 toward principal and only $2.78 in interest (assuming you paid once per month, only the minimum, every month for 360 months). At month 165 you will have the most even split. $393.63 to principal and $393.47 to interest is what you’ll pay three months shy of 14 years in. tarting with this payment, every month for the duration of the loan will pay more principal than interest.

Scarier than this is the total amount that you’ll pay! In borrowing the $160,000 remaining dollars (after the $40,000 is put down; 20% of $200,000) you will pay a total of $283,353.23! That’s the price of doing business. When you borrow- you have interest. Some people may believe that $160,000 times 4.25% is $6,800 in interest….sadly, this is not the case. There are ways to pay less and we can tackle them down the road.


Interest Rates

by Jim Ludes on February 3, 2014

in Buyers

In a meeting with Wells Fargo last week we were told to expect interest rates to average about 5.3 or 5.4% in the first quarter (Jan-Mar) of 2015. That’s a year away and not a terrible rate at all (I bought my house at a 6% years ago and, at the time, it was as good as a rate as anyone had had in eons). That said, the rate is around 4.5% now- and thus better. I don’t see it going down. You probably have 12-14 months to watch it slowly incline about a point.

What’s that mean to you? Simple. Buying power! Say for argument’s sake that you were to buy the exact same house (same taxes, same insurance

Interest rate Ex. 1

cost, same PMI rate, same down payment)…. At 4.5% you might expect to pay around $1,412 a month (all included). That would jump to $1,517 by increasing the interest rate to 5.4%! This is why people shop for rates*. In order to keep your monthly payment at around the same payment with the higher interest rate you have to spend less money on the purchase. This means the house that you COULD BE buying today at $200,000 isn’t the house you’re buying in a year or so. A that time, you’re probably buying a house of about $182,000. I’ll leave it up to you to tell me if there’s a difference in the house you get in your area for 200 as opposed to 180. And we’ll also keep it in the back of our heads that as interest rates go up- house prices are going to follow it.

Interest rate ex. 2

* What’s the asterisk mean, Jim? That little guy is there to remind me to tell you about APR. Simply, APR is going to show you what your rate is when you factor in the costs involved in acquiring your loan. It’s basically a quick way to determine the difference between two proposed programs. You might get a 5.3% interest rate as opposed to someone else’s 5.4% but are you paying $6,000 in costs as opposed to $4,000 to get it? It’s my experience that people ask about rate and go without ever inquiring about any closing costs. Banks and brokers have different fees. I can give you a loose ballpark about what I think they should cost- but I’m not in charge of that…. so put that in your lender interview packet of questions.