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Low Rate Mortgages: The Benefit You Never Heard Of Print E-mail
(6 votes, average 4.17 out of 5)
Personal Finance - Mortgage
Written by Omie Ismail   
Sunday, 13 September 2009 08:02
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Low Rate Mortgages: The Benefit You Never Heard Of
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Everyone wishes they had an ultra low rate mortgage because of the low monthly payments.  A 30 year mortage under 5% would classify as low interest today.  The monthly payment for a $400,000, 30 year loan at 4.5% is $2,027.  Compare that to a higher cost loan of 9 percent that might be given to someone with lower creditworthiness.  The same loan at 9 pecent is $3,218 a month, almost $1,200 more.  But there is something that very few people understand that may be far more important in today's flat or declining markets than the obvious lower monthly payment.

Low interest loans have the feature that they pay down your principal at a faster rate.  Both loans are 30 year loans, but what happens in between is far more important than what happens at the 30 year mark.  Why?  Because most people won't own their house or keep their loan for 30 years.

Let's see how this works in our hypothetical example.  To analyze we will use Excel and look at the principal balances for each loan below.

Amortization of 30 Year Low vs. High Cost Loan

Low vs. High Interest Rate

The table looks at the period (in this case months) and how much of the payment is principal and what the resulting balance is.  You can see that the borrower with the high cost loan owes $3,720 more after 12 months eventhough he has been paying nearly $1,200 a month more.  In the low cost example, its easy to see why, a full 25% ($527/$2027) of the first payment goes to paying down the principal.  At 9% however, the borrower might as well be renting because he is likely paying more more than the rental value but not building any equity.



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Nancy  - Guest post |2009-11-17 00:31:00
Hi,

I came across your website livecheap.com and found it very informative and helpful. I have some queries regarding the marketing issues and guest post.

If you could kindly contact me through mail, then I could proceed with the queries. Looking forward to your kind cooperation.

Waiting for your quick response.

Thanks and regards,
Nancy Smith.
nancysmith008(at)gmail(dot)com
MyTurn  - Low Rate Mortgages: The Benefit You Never Heard Of |2010-03-03 16:32:06
A prospective buyer/renter should never consider this article as his/her base when comparing buying a house to renting. Nor should anyone buy a house as a way of saving BIG bucks unless he/she considers ALL factors involved. It would be foolish to do so. No wonder, thanks to misleading advertisements like this one, thousands of us are losing our homes to the banks. So much for us saving 100 grands over 10 years!
This article is nothing more than an exercise in comparing interest rates, and is not a true useful measure to anything else. Before buying a house, for example, a buyer should have Already saved a down-payment of about 20% of the property value, which is required before closing; the buyer should also consider closing costs, property taxes, home insurance, the hefty costs to maintain a home: Lawn care, snow removal, garbage collection, gutters cleaning, utilities costs...etc (these costs could eat rapidly into your savings).
Please go to Bankrates.com and other more experienced sites to learn all you could about buying/renting a house before your name goes on the dotted line.


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amp  - Breathe in - Breathe out! |2010-03-10 13:43:50
My apologies - but I am stepping in here -

I am sure your comments are fueled by your own personal experience, but this site and this article provide sound advice regarding how to live the good life ... cheaply! You note feeling mislead by the promise of saving a $100,000 in ten years - - I have always felt that the best part of my mortgage is that while my payment does go to the bank, I am really paying myself – which is a lot better than paying the same or more to a landlord and it’s deductible!

The author clearly notes precursors to purchasing a house (down payment, area where you plan on staying for ten years, etc.). We have had mortgage interest rates below 9% for 10+ years. Previously (70s, 80s, & 90s), people opted for variable rates because the interest rates were so high (above 10%). Unfortunately due to the variable rate, their payments/rates fluctuated beyond 17%. As a result, many learned to choose fixed rate mortgages only. In 2000, when housing prices began to increase, interest rates were slightly above 8%. By 2003, along with price increases, the rates dropped by half and nearly everyone refi'd or bought a home for a price they never imagined. People got caught up in the “housing shortage” and bought homes during the peak. Followed by the current economic situation we are in, most of these homes are not “worth” they price that was paid compounded by jobs lost.

Over and over this site stresses living simply, cheaply, and saving money - Three items that have not been “in” for nearly 20 years – and sadly, much of our current economic difficulties can be rooted in living beyond our means and on the promises of tomorrow.
Sleuth  - Mortgage Rates. |2009-09-21 11:56:40
This was explained rather well. I think just about anyone could understand this article even though it is a complex subject.
 
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