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How To Calculate Mortgage Interest Rates To Discover The Truth In Your Payment Rate!

Guest post by: Sam Assil

Article Overview: When is a mortgage Interest Rate of 3.75% really 67.5%? When it is the mortgage on your home!

How To Calculate Mortgage Interest Rates To Discover The Truth In Your Payment Rate!



I have been in the Real Estate business for the past 25 years and currently hold a Brokers License in the State of Illinois. The topic which I am about to speak on, is one that I have had much experience

in and one that I am definitely qualified in. The two biggest questions I have found which all my buying clients have always had are one: what is the lowest price that I can pay for this property and two: what is the best interest rate that I can get? Of course I am talking about clients that do not pay cash and need to obtain a mortgage, which has been for me, just about all of them. Let's talk about mortgage interest rates and what they really are in the reality of what one actually pays for that property and the percentage of interest out of all mortgage payments made.

This morning I went online and checked with one of our nations largest lenders to see what was the best mortgage interest rate they were offering. Obviously the best rates are reserved for only those with the the highest and most impeccable credit. Lenders always wish to limit the risk to themselves. They will reward the best clients with the best rates. I am not going to go through all the other factors that lenders use to qualify applicants. Let's just assume that one is qualified in the example which I am about to give for a loan of $200,000 dollars. One has the required down payment and falls within the proper debt to income ratio. I found being offered today a rate of 3.75% fixed for 30 years. Fixed means the rate and monthly payment never changes and is spread over 30 years or 360 months. That is 360 payments. The next best rate I found was 3.25% fixed for 15 years. Same way but for 180 months or 180 payments which is 15 years. These rates are very low and sound very attractive. They sound great. Most people would jump at either of these mortgage rate plans. Home buyers might even pay a fee or what are called points so that they can have one of these rate plans! However, they are really not what they seem to be! Let me break down both of these excellent, by historical standards, mortgage interest rate plans in order to show truthfully what they really represent.

Let's talk about a loan of $200,000 dollars at 3.25% fixed for 30 years. I ran what is called an amortization schedule. This is what the banking and mortgage industry uses in order to calculate what the monthly payment is and give a break down of how much of ones money applies to interest and how much applies to principal, that which one originally borrowed. Here is the breakdown. The monthly payment on this loan will be $926.23. Now I am not including any other additions to this payment such as property taxes, or insurance. I am only going to show what the actual interest and principal breakdown is. Notice that I say Interest and principal and not the reverse. The first monthly payment breaks down like this: $625 dollars is applied to interest and $301.23 is applied towards principal or loan reduction. Now hear is the simple math equation that one can use to figure the percentage of interest that is payed in that 1^st monthly payment. Simply take the interest portion of $625 dollars and divide that number by the actual dollar amount that came out of ones checking account, or pocket I like to say, and hear is what one will find. $625 divided by $926.23 is equal to .674 or 67%. Yes 67 percent interest!

Now lets look at the totals after the first year. Twelve payments of $926.23 is equal to a total of $11,115

dollars payed out. The total interest payed out of that is $7,437.21. Divide interest by total payed to determine the percentage and that figure is .67 or 67% interest! Wow where did the 3.25% go? Now let's look at some totals down the years. After five years one will have payed out a total of $55,574 dollars in mortgage payments. Out of that figure $35,635 is applied towards interest. Divide $35,635 by $55,571 and the number is .64 or 64%. Yes 64 percent is the actual average interest rate payed on that $200,000 dollar loan at that excellent, illusionary rate of 3.25%. If one looks at the ten year totals one will find the true interest rate payed out to be 61%. The rate does decrease gradually over the years.

If one were to pay consistently over 30 years, the average interest rate will come out to be 40% and not anywhere near that most excellent rate, reserved for only the best customers, of 3.25%.

This is what I call the banking magic effect of the compounding numbers. The truth is that the only time that one would actually pay 3.75% or less is if that original loan of $200,000 was payed back at the end of the first year or sooner and not with another mortgage loan. Few to none ever do this.

Now lets look at that same loan of $200,000 dollars at a most excellent rate of 3.25% fixed for 15 years. The first months payment comes out to be $1,405.35. That is principal and interest only. Notice this time I said the reverse of what I said on the 30 year rate. Out of this figure $541.67 is applied towards interest and the greater portion of the payment is actually applied towards principal. Now let's take a look at the true interest rate. Interest of $541.67 divided by payment of $1,405.35 is equal to .385 or 38.5% interest . Much better than the 30 year program .But once again nowhere near that illusionary rate 3.25%. After five years total payments amount to $84,321 and total interest payed out of those payments will be $28,135. Divide interest payed by total payed out to come up with the true interest rate of .33 or 33%. After ten years the total interest payed comes out to 27.5%. Continue with this plan for the total of fifteen years and the actual interest rate payed is 21%. A far better rate than the thirty year plan. But still nowhere close to that illusionary rate of 3.25%. More banking magic, in there favor of course.

So in summary while payments of $926 dollars or $1,405 dollars on a $200,000 mortgage loan can be quite affordable to many, the truth is that the interest rate, or the interest rate carrot so to speak, is never really what one has been led to believe! It is true however that the lower the carrot rate or deception rate, the lower the actual true interest rate will be. I ran this example at a rate of 5.5% and came up with a true interest rate of 80% after year one on a 30 year program! If one has the ability to pay cash for a property than it might be easy to see by my examples hear how that cash can actually give one a return on ones money of anywhere from 21% to 67.% verses the mortgage interest rate program, using reverse reasoning!

I hope That I have shed some light and clarity on how to calculate mortgage interest rates and the truth really behind them. Anyone can find an amortization schedule on the internet or just ask your realtor or banker for a detailed schedule. Remember that the truth will always empower you once you decide to see it. What you do and the actions you take are your choice. One more thing I hope that one can see here is that the answer to the first question of what is the lowest that this property will go for is actually figured in the answer to the second question of mortgage interest rate. Be empowered or be overpowered in today's world! Sincerely....Sam Assil

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Article Tags: home loans, how to calculate mortgage interest rates, mortgage interest rate, mortgage interest rates, truth
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Related Forum Posts
Time to get rich in real estate? - Another thing I'd do if I had a million bucks...or more... would be to start buying up distressed real estate. Sounds ghoulish, I know, but prices are down so much now that anyone who can afford to buy houses and hold onto them until the market "corrects" itself, could make a bundle in a few years. I've been reading a great deal about the current mortgage crisis, and I've got to say that whatever genius came up with the Adjustable Rate Mortgage - and worse, actually persuaded people to buy using it - deserves to be boiled in his own oil and buried with a spring of holly through his heart! What a ridiculous thing - just asking for trouble!
Re: Time to get rich in real estate? - [quote="OmnivoreInk":397sdq49]Another thing I'd do if I had a million bucks...or more... would be to start buying up distressed real estate. Sounds ghoulish, I know, but prices are down so much now that anyone who can afford to buy houses and hold onto them until the market "corrects" itself, could make a bundle in a few years. I've been reading a great deal about the current mortgage crisis, and I've got to say that whatever genius came up with the Adjustable Rate Mortgage - and worse, actually persuaded people to buy using it - deserves to be boiled in his own oil and buried with a spring of holly through his heart! What a ridiculous thing - just asking for trouble![/quote:397sdq49] I've gotten into a few loans that I didn't check the terms as thoroughly as I should have, but its hard to imagine someone signing deed of trust papers for that amount of money for 30 or so years and not understanding the terms. I would never want an adjustable mortgage - even before these latest problems, the financial system is unpredictable. Things can change A LOT in 30 years - look what happened in 4 or 5 years. Chris
Micro Loans - That's interesting Russell. The following is more information on Micro Loans and anyone within the USA who would like a list of Micro Loan Lenders (listed by State) I have that information! Just let me know and i'll get it out to you in my spare time. The Microloan Program provides very small loans to start-up, newly established, or growing small business concerns. Under this program, SBA makes funds available to nonprofit community based lenders (intermediaries) which, in turn, make loans to eligible borrowers in amounts up to a maximum of $35,000. The average loan size is about $13,000. Applications are submitted to the local intermediary and all credit decisions are made on the local level. Terms, Interest Rates, and Fees: The maximum term allowed for a microloan is six years. However, loan terms vary according to the size of the loan, the planned use of funds, the requirements of the intermediary lender, and the needs of the small business borrower. The maximum loan amount is $35,000, however, the average loan amount is around $13,000. Interest rates vary, depending upon the intermediary lender and costs to the intermediary from the U.S. Treasury. Generally these rates will be between 8 eight percent and thirteen percent. Collateral Each intermediary lender has its own lending and credit requirements. However, business owners contemplating application for a microloan should be aware that intermediaries will generally require some type of collateral, and the personal guarantee of the business owner. Technical Assistance Each intermediary is required to provide business based training and technical assistance to its microborrowers. Individuals and small businesses applying for microloan financing may be required to fulfill training and/or planning requirements before a loan application is considered. How to Apply: Small businesses that are interested in applying for a microloan should contact a microlender in their area.
Re: Japanese Earthquake - Make Me Pay! - Payment made - happy to help!
Re: Hi - Thanks guys! I have been helping Real Estate and Mortgage professionals generate leads from the Internet for 5 years now!. I'd be glad to exchange some ideas. Have a great day=)


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