Mortgage Rates and the Cost of A Loan


How does the mortgage rate affect the amount you pay long term?


This is one of those questions that seems to have a pretty simple answer; the interest rate is the amount of interest you are paying for the money you are borrowing.

So a higher interest rate raises the amount of money owed each month on the debt. If one interest rate is higher than another (all else being the same) then that payment will be higher. Take the difference and multiply it by the loan term you are comparing.

So a loan for $200,000 30 year fixed at 6.5% is $1,264.14

The same loan at the interest rate of 5.5% is $1,135.58

So that is $128.56 times 360 or a total of $46,281.60

However, the first loan would have a potential for a larger TAX Benefit.

In reality these two options (if presented at the same time) would represent a no cost loan at 6.5% and a rate buydown loan (full fees plus a discount point or 2 to get to the rate.)

So if you had to pay 2 points to get the rate and all the fees on the loan that would be about $12,500 total….so your savings would not even break even for 96 months or about 8 years. If you refinanced or moved prior to that day then you would have spent MORE money than you would have taking the higher rate. Most mortgages are refinanced within 5-7 years.

It’s a little different if you wrap the fees into the loan. So lets try this:

We loan the customer (let’s say

This is $133.05 more per month, but ALL of the payment may be a TAX BENEFIT. plus we saved him $702 for the next 4.5 years.

If you checked my math you know we also gave him 10,000 to invest. So if he adds the 702 to the 10K he will have $49,312 in 4.5 years in the bank PLUS INTEREST. Not to mention the yearly TAX savings. In this scenario the borrower is paying the same money out of pocket as before, but net worth and tax benefits are astounding, and the borrower now has a safety net.

I know what your saying, most people do not have the discipline needed to do this, but remember a Financial Planner can arrange to have the funds removed automatically each month from there account, and a CPA can help them take advantage of the tax benefits.

So while the interest rate is important and some lenders have a few more or fewer fees. The advice is what makes the biggest difference. If this borrower continued to contribute the 702 for the full I/O period of 10 years the total is $94000 PLUS INTEREST. PLUS EQUITY; PLUS TAX SAVINGS.

Advice that makes a difference!

Answered about 9 years ago
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