Mortgage Rates Exposed

First let’s talk about mortgage rates. A lot of times when you go and refinance, or get a new loan when purchasing a new house your interest rate is going to be between 3% to 5%. Now, some of y’all may have less than this, because your credit score is great, or you have a good amount of money. Now, a 3% to 5% interest rate may not seem that bad, because it’s low. Historically, it is low if you go back to the 1970’s and 1980’s interest rates were as high as 18%. I’m going to tell you why this is equally as dangerous as 17% or 18% interest rate. It’s because of the amortization period, and this is what banks don’t really want to talk about.

30-Year Amortized Loan

A lot of Americans get a 30-year amortized loan, and I’m going to show you why a 30- year amortization loan plus the 3% to 5% interest rate don’t mix well together, especially if you want to save money on interest. So let’s look at the 3% scenario. Lets say you go to the bank and get a 3% on a $250,000 loan. If you calculate a 3% interest rate on a $250,000 loan you’ll notice that the accrued interest that you have to pay by the end of 30 years is a large amount in terms of interest. So that 3% interest rate that doesn’t seem like it was going to hurt the budget, but you’ll find out that you’re going to be paying a good chuck of money for interest.

Whenever you go talk to a mortgage lender, pay attention to the accrued interest amount. Mortgage lenders don’t want to talk about this, because once you find out what the interest amount is you’re probably going to be stunned. So they don’t want you to pay attention to the accrued interest amount, they only want you to pay attention to the interest rate. Because they know just by looking at the 3% interest rate, you’re going to say that’s not bad, lets get the paperwork started.

Now, let’s say you got a 5% interest rate on a $250,000 loan for a 30-year amortization period. Once the 30-year period is up you’ll notice that you paid close to double the amount that you borrowed. Meaning if you borrow $250,000 at 5% interest for a 30-year amortization period, you’re going to pay close to $250,000 just in interest alone. So your total payment is going to come close to $500,000. So you just brought yourself a house, and your mortgage lender a house. When people don’t pay attention to the accrued interest amount, they just go for the 5% interest rate. Because they think 5% is low. It’s not about the interest rates, it’s about how much you’re going to be paying on the loan.

Refinancing

I don’t know how many people have noticed this, but during the first 10 years of your mortgage loan the banks puts most of your payments towards interest, and little towards the principal. After the 10 years, your payments start to gradually bring down your principal. When this starts to happen, you may get a call from your lender telling you you’ve been doing a great job paying your mortgage over the past 10 years. They have a promotional rate that can save you money. If you’re interested come into the office, so we can refinance your mortgage loan. A lot of people think this is an amazing deal.

Here’s the issue with refinancing, when you refinance you go back to the 10-year interest based period that you just got out of. So now your paying more in interest, and little in principal. Unfortunately, you can get stuck in this period where you just keep refinancing to lower the mortgage payments. Now, it’s hard to get to the part where you’re paying off your mortgage, and building up equity. The banks don’t want you to get past this period, because once you get past the principal pay off period, they’re not making much money off of you anymore.