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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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