I went to some mortgage calculator website and put those numbers.
Loan amount: $100,000
Interest rate: 5.20 %
Amortization: 25
Monthly mortgage payment will be: $593.04
Yearly: $7116.48
What really confused me was when I calculated the total payment after 25 years.
7116.48 X 25 = $177,912
The question is, how come only %5.20 interest rate will end up paying about 77K over the original 100k price of the property? Or is it how things work out for mortgages? Sorry I’m from 3rd world countries and kinda don’t get things right over there.
Mortgages work on simple interest. This means that all the interest you will pay is precalculated, and the total amount (177k and change) is then amortized (or made into equal payments) into a 25 year term. Your math is correct. Believe it or not, if the deal you are showing her is true, you are getting a fantastic deal. The interest rate you recieve is based on many factors. You loan amount, credit and job will have a lot to do with your interest rate. Also be aware that your rate is also very dependant on how much you pay in closing costs. A 5.2% rate is well under par, meaning you will likely have to pay a couple points as well as the lender’s regular costs. On this loan amount, i would be surprised if your costs are less than 5k to get the rate you are stating, so be aware, you will be paying this much to get the loan. The best way to save yourself a lot in interest is to pay the loan off as soon as possible. If you can make at least one extra mortgage payment per year, you will likely shave off 3 to 5 years on the mortgage, meaning saving yourself tens of thousands in interest.
Welcome to banks making money. Its compound interest. Interst is calculated after every payment not on the loan amout as a whole. For the first repayment you pay interest on the whole loan amout the second repayment you only pay interest on what remains after the first payment and so on… So the more you pay off to start with, the less interest you pay in total.
References :
Month 1. $100,000 * .052 * 1/12th = $433.33 interest
Month 1 payment 593.04 – 433.33 = 159.71 towards principal.
Month 2. $99841 * .052 * 1/12th = $432.64 interest
Month 2 payment 593.04 – 432.64 = 160.40 towards principal.
So…year one is roughly $160/month principal.
$1920 for year.
Year 2 starts $425 interest. $168 principal.
$2016 for year.
You don’t pay more than half in principal until 2/3rds of the way through the loan….
Even the "short cut" method–on average, you’d think you’d owe 1/2 of the total. $50,000 * .052 * 25 = $65,000!
References :
Mortgages work on simple interest. This means that all the interest you will pay is precalculated, and the total amount (177k and change) is then amortized (or made into equal payments) into a 25 year term. Your math is correct. Believe it or not, if the deal you are showing her is true, you are getting a fantastic deal. The interest rate you recieve is based on many factors. You loan amount, credit and job will have a lot to do with your interest rate. Also be aware that your rate is also very dependant on how much you pay in closing costs. A 5.2% rate is well under par, meaning you will likely have to pay a couple points as well as the lender’s regular costs. On this loan amount, i would be surprised if your costs are less than 5k to get the rate you are stating, so be aware, you will be paying this much to get the loan. The best way to save yourself a lot in interest is to pay the loan off as soon as possible. If you can make at least one extra mortgage payment per year, you will likely shave off 3 to 5 years on the mortgage, meaning saving yourself tens of thousands in interest.
References :