Why You Shouldn't Get Hung Up On The Interest Rate Of A Real Estate Loan
By: Jim Olivero
If you where told by a lender you where going to have to pay a high interest rate for your loan, say 12 interest for 30 years on his home with a payment of $750.00 per month. John's friend Bill is renting a house, but he is paying $750.00 per month in rent with no interest (I am using these numbers for illustration purposes). Now, it's a funny thing, but both men live in their homes for the full 30 years and guess how much money both paid out in that 30 years?
Do you think John would have paid more money in the 30 years then Bill did because John was paying a mortgage? The answer is no! Thirty years equal 360 months of payments and if you multiply 360 X $750.00 you get $270,000.00. That means both men paid the same amount of money over the 30 years with one BIG difference! John now OWNS his home but Bill is still paying rent and does not own the home. In fact Bill's rent more then likely paid the mortgage off for the owner of the house he is renting from.
As you can see, even though John was paying a mortgage payment of $750.00 per month, the total amount of dollars paid in the same time period of 30 years is the same. Now Bill has nothing to show for all the rent payments he made except for 360 rent receipts. So you can see how the interest rate does not change the total amount paid over the time period because $750.00 per month is $750.00 per month. No matter what you call it a mortgage payment or rent payment, the bottom line is the same.
So whatever type of mortgage you can qualify for has to suit the payment you can afford and are comfortable with. Of course; the amount of money borrowed, the interest rate, and the term or years the money is borrowed is what will determine your payment.
So the bottom line is: if you get a mortgage that is comfortable for you payment wise... let's say equal to what you were paying for rent, the major thing you changed is the fact that you own the home now and you are not just paying rent or paying off someone else's mortgage.
You know the bottom line is we all have to live somewhere and we have to pay for that living space, so why not own what we have to pay for anyway. And don't get hung up on the interest rate to where it stops you from buying your home... just make the payment amount work for you.
Now let me show you what you can do with a mortgage payment that you can't do with a rent payment.
Stay with me now because it is going to get really good! As you have seen from our example above, the total amount of money paid over the 30 years or 360 payments for the mortgage and rent came out to be the same dollar amount in the end. However, did you know you could change the bottom line or the dollar amount paid when you are making a mortgage payment as well as the amount of time it will take to pay the money back?
A mortgage is calculated by the amount of money borrowed, the interest rate, and the amount of time it will take to pay it back. This calculation is called an amortization schedule. I am going to show you an amortization schedule for a mortgage now and show you how to change the total amount of money you will pay and the amount of time it will take to pay it back! Lets say you get a mortgage for $75,000@12% for 30yrs This is what the amortization schedule will look like:
Payment ---- Interest ---- Principle ---- Balance
$771.46 ----$750.00 -----$21.46 ------$74,978.54
$771.46 ----$749.79----- $21.67 ------$74,956.87
$771.46 ----$749.57 -----$21.89 ------$74,934.98
$771.46 ----$749.35----- $22.11 ------$74,912.87
$771.46 ----$749.13 -----$22.33 ------$74,890.54
$771.46 ----$748.91 -----$22.55 ------$74,867.99
$748.68 ----$748.68 -----$22.78 ------$74,845.21
$771.46 ----$748.45 -----$23.01 ------$74,822.20
$771.46 ----$748.22 -----$23.24 ------$74,798.96
$771.46 ----$747.99 -----$23.47 ------$74,775.49
$771.46 ----$747.75 -----$23.71 ------$74,751.78
Totals ----$8,237.84 ----$248.22
As you can see, when you make a payment on a mortgage a large part of the money goes to interest with a small part of the money going to principle. You will notice the principle balance increases with each payment and the interest balance decreases with each payment, but this happens very slow.
Now, let me show you what control you have over a mortgage:
As you can see; in the 11 months of payments we made on this mortgage, we paid $8,237.84 in interest and $248.22 in principle! This is what YOU can do. When you looked at this schedule after your closing, you noticed the figures. If you were to add the total of the principle for the 11 months of payments ($248.22) to your first mortgage payment and told the lender you wanted the extra money to go towards the principle this is what would happen for you: you would reduce your mortgage by 11 months and save $8,237.84 in interest payments! This happens whenever you make extra payments on a mortgage, no matter how much or little you pay. You always have to specify that this extra payment is designated to go towards the principle and this works best if you start right away in the very beginning of the mortgage!
This means that in your first month you have already changed the total amount of money and time it will take to pay back your loan. The more you can do this, the less money you pay in interest and less time it takes to pay the money back.
The mortgage has to have no pre-payment penalties. That happens to be the majority of mortgages that we see today. However, ask and make sure so that you have no surprises later. This is just one simple thing you can do with a mortgage which gives you control of the bottom line as far as money paid back and the time it takes to pay it back.
Visit me at http://www.easymoney-123.com
I have been in the real estate investment business for over 25yrs. I have put a web site together with tons of information for anyone who wants to learn Come visit me at: http://www.easymoney-123.com
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