{"id":1792,"date":"2021-10-03T20:40:23","date_gmt":"2021-10-03T20:40:23","guid":{"rendered":"http:\/\/www.westcoastbk.com\/blog\/?p=1792"},"modified":"2021-10-03T20:42:06","modified_gmt":"2021-10-03T20:42:06","slug":"mortgage-interest-and-fun-with-numbers","status":"publish","type":"post","link":"https:\/\/www.westcoastbk.com\/blog\/2021\/10\/mortgage-interest-and-fun-with-numbers\/","title":{"rendered":"Mortgage Interest and Fun With Numbers"},"content":{"rendered":"\n

By Ryan C. Wood<\/a><\/p>\n\n\n\n

Do you know how much\nyour home will cost you?  That is the\ntotal cost of the loan?  Did you look at\nthe total amount of interest you will end up paying if you make each and every\nmortgage payment for 30 years?  What if\nyou refinance in year three?  How will\nthat change what you are paying?  One of\nthe nastiest parts of purchasing a home is that your mortgage payments are\nheavily weighted to pay interest first rather than principal.  When a house value is continuing to increase\nthis is not a huge issue.  If the value\nof the home is slowly increasing or the market is stagnated your investment by\nbuying the home is actually decreasing each month.  The mortgage meltdown crisis should tell you\nenough about how things work.  <\/p>\n\n\n\n

Too big to fail versus too small to matter is how it went down.\u00a0 Just ask any bankruptcy attorney<\/a> that lived the mortgage meltdown.\u00a0 <\/p>\n\n\n\n

The thing is though\nmost people will never be able to pay cash for a house.  Spreading out payments over 30 years makes\nthe loan affordable and allows more people to purchase homes that could not\notherwise.  Purchasing a home and the\nresulting fixed monthly mortgage payment is usually a huge financial win for\nhousing costs.  Rent increases with\ninflation and other market conditions significantly over time.  This is why rental properties are such a\ngreat investment under most circumstances. \nOnce you purchase a home though hopefully your wages increase but your\nhousing costs stay the same.<\/p>\n\n\n\n

What\nIf Mortgage Payments Were Half Interest and Half Principal From the Beginning?<\/strong><\/p>\n\n\n\n

Here comes the fun with\nnumbers part to illustrate the huge difference. \nLet us take a $1,000,000 homes since that only gets you one bedroom with\na bathroom on the Peninsula in the Bay Area where I am located.  With a 20% down payment to avoid private\nmortgage insurance the mortgage loan will be $800,000.00.  To pay off the $800,000.00 loan at a fixed\ninterest rate of 3.7% and amortized over 30 years the total amount paid will be\n$1,427,615.00.  Of that total interest\npaid is $525,615.00.<\/p>\n\n\n\n

Amortization Schedule<\/p>\n\n\n\n

$800,000.00 at 3.7%\ninterest with 360 monthly payments<\/p>\n\n\n\n

Total Payments:\n$1,325,616.14 <\/p>\n\n\n\n

Total Interest:\n$525,616.14<\/p>\n\n\n\n

The first mortgage\npayment is about 67% applied towards interest and 23% applied to\nprincipal.  Over the life of the 30 year\nmortgage these percentages slowly change. \nAt the 6 year mark 60% is applied to interest and 40% is applied to\nprincipal or $1,471.24 towards principal and $2,211.02 towards interest ($3,682.26\ntotal monthly payment).  The middle mark\nof the loan term or the 181th payment is 43% principal and 57% interest.  The last payment of 360th<\/sup> payment\nis a mere $11.32 towards interest and $3,670.95 to principal and the loan is\npaid in full.  The 360th<\/sup>\npayment is 0.30% interest and 99.70 % principal.<\/p>\n\n\n\n

At 2.75% interest:\nTotal Interest Paid: $375,734.60<\/p>\n\n\n\n

At 3% interest: Total\nInterest Paid:  $414,219.62      +38,485.02  <\/p>\n\n\n\n

At 4% interest: Total Interest\nPaid: $574,956.05       +$160,736.43<\/p>\n\n\n\n

At 4.5% interest: Total\nInterest Paid: $659,253.69    +$245,034.07<\/p>\n\n\n\n

Let us assume we are in\nyear 7 and you have now paid $316,674.36 in total principal and interest.  Of this you have paid approximately $174,173.00\nin interest through 86 or seven years of mortgage payments.  We will come back to this below when\nexamining the result of a refinancing the mortgage to a new fixed 30 year loan\nto get a better percentage rate of pull out equity that has accrued in the\nseven years since purchase.<\/p>\n\n\n\n

So how do mortgage\nlenders ever lose money?  Everything they\ndo is resulting in interest income from funds on deposit and getting money from\nthe Federal Reserve at a lower rate.   <\/p>\n\n\n\n

Why\nAre Mortgage Payments Primarily Applied to Interest and Not Principal In the\nBeginning?<\/strong><\/p>\n\n\n\n

This type or amortization provides for equal payments throughout the entire 360 month or 30 year term of the mortgage.\u00a0 As a bankruptcy attorney<\/a> I can tell you that this probably a necessary evil and helps people keep things straight.\u00a0 There is a huge percentage of homeowner are just getting by each month and pay different amounts each month for their mortgage.\u00a0 Why you ask?\u00a0 The vast majority of people buy too much house and cannot pay a down payment totaling 20% or more to avoid private mortgage insurance.\u00a0 They make it worse by choosing to not pay property taxes and insurance directly but via the monthly mortgage loan payment. You will then be dependent upon the servicer or mortgage company to recalculate the property tax and insurance as the property taxes increase.\u00a0 Therefore the mortgage payment must increase too.\u00a0 The problem is many servicers and mortgage companies fail to timely and regularly recalculate the taxes and insurance so this results in large changes in the monthly payment to catch up on already paid property taxes.\u00a0 This system is ripe for fraud and miscalculation.\u00a0 <\/p>\n\n\n\n

Does\nAnyone Save Money When Refinancing A Mortgage Loan?<\/strong><\/p>\n\n\n\n

Did you calculate the\namount of interest paid versus principal prior to refinancing your mortgage\nloan?  Or is the enticing thought of\npaying less each month or obtaining the cash from pulling out equity from your\nhome too much to pass up?      <\/p>\n\n\n\n

So taking our example\nabove you paid $174,173.00 in interest during the first 7 years of your\nmortgage loan and decide to refinance at a lower percentage rate.  We shall use 2.70% instead of 3.7%.  After 7 years of payments the principal owed\nat that time and the amount refinanced is $683,076.57.  Your new refinanced loan with a new term 30\nyear term at 2.70% will cost you a total of <\/p>\n\n\n\n

Amortization Schedule<\/p>\n\n\n\n

$683,076.57 at 2.7%\ninterest with 360 monthly payments <\/p>\n\n\n\n

Total Payments:\n$997,395.73 <\/p>\n\n\n\n

Total Interest:\n$314,319.16<\/p>\n\n\n\n

Just comparing the\nloans on their face you will save $211,296.98 total.  But did you take into account all the\ninterest already paid?  Yes, you reduced\nthe principal and you are refinancing the lower principal amount too.  How much did you really save though?  When taking into account the interest already\npaid totaling $174,173.00 already you will save about $37,123.98 over the total\nlife of the 30 year loan.<\/p>\n","protected":false},"excerpt":{"rendered":"

By Ryan C. Wood Do you know how much your home will cost you?  That is the total cost of the loan?  Did you look at the total amount of interest you will end up paying if you make each and every mortgage payment for 30 years?  What if you refinance in year three?  How […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[14],"tags":[118,116,395],"_links":{"self":[{"href":"https:\/\/www.westcoastbk.com\/blog\/wp-json\/wp\/v2\/posts\/1792"}],"collection":[{"href":"https:\/\/www.westcoastbk.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.westcoastbk.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.westcoastbk.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.westcoastbk.com\/blog\/wp-json\/wp\/v2\/comments?post=1792"}],"version-history":[{"count":1,"href":"https:\/\/www.westcoastbk.com\/blog\/wp-json\/wp\/v2\/posts\/1792\/revisions"}],"predecessor-version":[{"id":1793,"href":"https:\/\/www.westcoastbk.com\/blog\/wp-json\/wp\/v2\/posts\/1792\/revisions\/1793"}],"wp:attachment":[{"href":"https:\/\/www.westcoastbk.com\/blog\/wp-json\/wp\/v2\/media?parent=1792"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.westcoastbk.com\/blog\/wp-json\/wp\/v2\/categories?post=1792"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.westcoastbk.com\/blog\/wp-json\/wp\/v2\/tags?post=1792"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}