The Math Behind The Mortgage

This is a sponsored post written by me on behalf of Chase. All opinions are 100% mine.

Buying a home and taking out a mortgage loan go hand in hand for most Americans. However, most Americans only think about mortgages when they’re filling out their mortgage application right before or right after they put an offer in to buy a home.

Most people take out a standard 30 year fixed rate mortgage, but few people consider how much a simple part of your mortgage can affect your mortgage payment. That small part is your mortgage interest rate and it can make a huge difference over time.

According to a recent survey by Chase, many Americans are ready to jump into the housing market and purchase a home this summer. For these Americans, and anyone else that is looking to buy a home, the infographic below, prepared by the experts at Chase, does a great job of illustrating just how important it is to get a great interest rate on your mortgage. Check it out, then I’ll highlight a few points.

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According to the example, an average sales price of a house currently costs $343,300 and a typical mortgage ends up being 80% of the purchase price after a 20% down payment. This would result in an initial loan balance of $274,640. The following figures assume a 30 year fixed rate mortgage.

Even a small change in the interest rate, such as 0.5%, can make a huge difference. If you can find a 4.5% interest rate mortgage instead of a 5% interest rate mortgage, your payment will be $82 a month lower and you could save $4,920 in interest expense over the first five years of the mortgage.

Bigger changes, such as a whole percent decrease, will bring even more drastic changes. If you score an interest rate one percent lower, such as 4% instead of 5%, you would save $163 a month on your mortgage payment or $9,780 over the first five years of the mortgage. Over the whole 30 year mortgage, that 1% difference in your interest rate results in a difference of almost $60,000 in interest.

Now that you can understand why securing a lower interest rate is so important, you need to make sure you understand what type of interest rate environment we are currently in. Right now, mortgage interest rates have slowly been rising over the last few months. Even a half a percent increase in your mortgage rate can make a huge difference, so it may make sense to buy a home sooner rather than later if you expect interest rates will continue to climb higher.

Mortgage rates have just topped the 4% mark in June, a level that hasn’t been breached since November 2014. That’s still a whole percentage less than the base case in the example above. However, interest rates could continue to rise and they may hit the 4.5% or even 5%, as in the example, in the near future. Alternatively, interest rates could level out or go lower depending on what happens in the economy.

If you are able to secure a lower interest rate, it is important to realize that your home ownership costs won’t simply be limited to your principal and interest mortgage payment. You’ll have to pay real estate taxes, insurance and home repair costs in addition to your mortgage payment. You may have to pay homeowners’ association fees, renovation costs or even for new furnishings depending on what home you buy. Additionally, when you close on your home, you’ll likely have to pay a good amount of money in closing costs unless you’re an expert negotiator and get the seller to pay all of your closing costs.

Sadly, many people ignore these common additional costs to home ownership, so they’ll end up having to spend their interest rate savings on these costs. If you plan for these costs ahead of time, securing a lower mortgage interest rate will allow you to actually save the money from your lower mortgage payments.

If all of this is overwhelming to you, luckily there is help. Chase has a ton of experience in the homebuying process and has compiled a great resource for prospective homebuyers at chase.com/homebuyers that you can check out today.

Given the current rising interest rates, are you considering buying a home in the near future? Do you think interest rates will continue to rise? Let me know in the comments!

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About Lance Cothern

Lance Cothern, a Certified Public Accountant (CPA) licensed in the Commonwealth of Virginia, is the founder of Money Manifesto. You can read more about him here or connect with him on Facebook, Twitter, Google+ or Pinterest.

Comments

  1. Isn’t it amazing how much money HALF A PERCENT of interest costs us over the long term? I wonder what it would look like if someone did this with ice cream (what just two little scoops a day costs you…..). Yum and probably terrifying.

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