This might be duh for some people, but if you’re like me and considering a mortgage; at today’s rates in the US at around 5-6%, over 30yr mortgage you will pay about same in interest as you will for your house price.
Your $500k house will cost you around $1M total over thirty years.
I was surprised.
Yes, this is how interest works and how lenders make money. It’s a lot.
The lessons are:
Pay a little bit more every month (applied to principal) to the effect of 1 additional monthly payment a year or more. It will dramatically reduce your overall interest and length of loan.
You’re talking about a long loan, during that time rates will rise and fall. When they fall, you refinance at a lower rate. Don’t extend your loan longer (don’t take another 30 year loan after you’ve lived there 5 years, take a 25 year loan). That will give you the best market results for something you can’t control.
Look at the terms of your loan and your average return on your portfolio before blindly paying your mortgage early. If you manage to refinance at a good interest rate, you can often make more money on the market than you save on your mortgage. If I applied the balance of my savings to my principal today, I would lose significantly more interest from my investments than I’ll pay in interest to my bank over the life of my loan.
In 1983 it was 17%.
A high interest rate of one year isn’t going to do much over the course of 30 years.
In 1983 it was 17%.
A high interest rate of one year isn’t going to do much over the course of 30 years.
On error: 1981 was the high point.
one year isn’t going to do much
One year is a short mortgage. Here’s 32 years where the prime rate’s been almost consistently on the hard side of 6. Your parents had excellent jobs before the '80s, but it wasn’t all rosy.
year bank rate prime lending rate 1969 7.46 7.96 1970 7.12 8.17 1971 5.19 6.48 1972 4.75 6 1973 6.12 7.65 1974 8.5 10.75 1975 8.5 9.42 1976 9.29 10.04 1977 7.71 8.5 1978 8.98 9.69 1979 12.1 12.9 1980 12.89 14.25 1981 17.93 19.29 1982 13.96 15.81 1983 9.55 11.17 1984 11.31 12.06 1985 9.65 10.58 1986 9.21 10.52 1987 8.4 9.52 1988 9.69 10.83 1989 12.29 13.33 1990 13.04 14.06 1991 9.03 9.94 1992 6.78 7.48 1993 5.09 5.94 1994 5.77 6.88 1995 7.31 8.65 1996 4.53 6.06 1997 3.52 4.96 1998 5.1 6.6 1999 4.92 6.44 2000 5.77 7.27 2001 4.31 5.81
At least at the end of the mortgage you will have a house. If you’re renting you’ll be paying pretty close to the same amount but won’t have anything to show for it. And then consider that a house will usually appreciate in value over that initial $500k after 30 years.
Compared to renting, you pay substantially more when you own. Maintenance, repairs, insurance, property taxes, full utilities. Mortgage is just the base you pay.
At the end of the day, sure you own the house, but all those extra expenses don’t go away. Lately I have been seeing retired home owners selling because they can’t afford all the upkeep so they end up moving into a smaller unit.
Decades ago buying was a no brainer, but do you really think houses will continue to appreciate at this rate? Will a 2 bedroom run down bungalow really be worth 2 or 3 million in 10 years? At least with renting you can invest that money you save from not buying and get a guaranteed return.
For the record, I’m not saying not to buy, but you should not just buy because you think it is a good financial decision. It might not end up being the case depending on where you live
I pay less, but I also got a 3% mortgage. Though, if you include things I purchased because I wanted them: smoker, pavillion, garden, etc then I’ve paid much more. Some things raise the equity of the house, others don’t.
If you’re renting you’ll be paying pretty close to the same amount but won’t have anything to show for it.
You also won’t have had to maintain a house or pay property taxes. I sold mine and rent now because I found ownership to be a PITA. YMMV.
Yeah, that’s how interest on debt works. It works the same way on your savings account, where the bank is essentially borrowing money from you at x% interest.
It’s actually worse in the case of mortgages because they’re front-loaded with interest, which will eat into your profits if you sell the house early.
You may be surprised that the average 30 year mortgage lasts fewer than 10 years due to being refinanced or paid off like in the event of a home sale. That’s why people use the 10 year yield for comparison.
When I bought my house in 2015, they told me 7 years was their assumption when you buy points. I bought the points thinking 3.25% for 30 was as good as it gets. Six years later I refinanced at 2.75 for 20, basically knocking 4 years of the end with the same payment.
