Finance Articles

House Mortgage: Are You Only Paying Interests?

Knowing exactly how much you should pay each month will tell you if you can afford the loan or not. However, knowing the total amount of what you need to pay for the course of your loan might totally surprise you. This is because the computation of the interest rate is different from what you might think. For example, you are borrowing $100,000 at 6% interest rate for a 30-year fixed-rate mortgage. As an unsuspecting borrower, you may think that you will pay $100,000 plus the 6% interest, which is just $6,000. But the fact is, you will pay more than $115,000 on interest alone! That is more that what you borrowed! How does it happen?

The reason for this is that interest rate is taken not from the total loan but from remaining unpaid balance. To get the total monthly fee, first, we take the 6% of the total loan, $6,000. We divide it by 12 for the months in one year. So, $6,000 divided by 12 is $500. That?s how much interest you pay for the 1st month of the mortgage payment. Your total monthly payment is $600 a month: $500 goes to the interest while only $100 goes to the principal. That means about 17% of your payment goes to your principal while the rest is paid for the interest. Since you pay $100 for the principal, the next month, your debt is at $99,900. You multiply $99,900 with 6% and divide the product by 12 to get the interest you have to pay, which is $499.50. So for your next payment of $600; only $100.50 will go for the principal while the rest goes as payment for the interest. This means, after paying $1200 for 2 months, you have only paid $200.50 for your mortgage. The case is much worse if the interest rate is set higher.

Moreover, if you think you have owned 50% of your house after 15 years, it is better to think other things instead. Because believe it or not, 15 years of paying your mortgage will only give you 29% ownership to your house. If you, however take a loan at 9%, 15 years of payment will only give you 25% ownership. Needless to say, you have a long way to go. To be able to own at least half of your house, you need to complete 21 years of monthly mortgage payment (22 years for a 9% interest rate).

The only thing that is good about this loan is that more and more of your payments go to the principal (less and less go to the interest) as time goes on.

The question now is, can you do something about it?

There are 2 ways to get a better deal: one is to pay cash and two is to get a shorter loan. The former is a mere impossibility; the latter is something that can be seriously considered. This is because a loan taken at a shorter term has a higher monthly payment which quickly shrinks down your debt. The total interest you will pay also shrinks from $115,000 down to a little over $51,000. For example, a $100,000 loan at 6% interest rate for a 15-year fixed-rate mortgage has a monthly payment of $841. This increase in monthly payment pays the principal down faster, thus, the amount you pay for the interest is lower. In other words, shorter term loan may have higher monthly mortgage payment but charges lower interest overall. But can you afford the 15 years loan instead of 30 years?

There is another possible way reduce the amount of interest you pay for your mortgage: prepayments. Having fixed monthly mortgage payments does not mean you have to pay is up to the decimal point all the time. You can lower the interest by paying more on the principal each month- that is if you have extra money to spare.

Why prepay?

Prepayment is a good investment since you speed up the term of your loan, at the same time, creating significant savings from the interest. Your money may be locked up to your equity which is not easy to access but prepaying provides you with a long term savings.

For more information on mortgage and home financing please go to: http://www.homefinancingalert.com/Financing-Home-NC.html http://www.homefinancingalert.com http://www.drnathaliefiset.com

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