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JLeslie's avatar

Do you know how much your house mortgage will cost you over time? Do you care?

Asked by JLeslie (47107 points ) 2 months ago

I was just talking about this on another Q and became curious.

I recently was looking at mortgages. A $250k loan over 30 years at 4.7% interest will mean you pay out around $220k in interest over the life of the loan. If you take out a 15 year loan instead at 3.8% (15 year loans typically have .5–1.% lower interest) the interest is around $80k. Do those numbers shock you? You save $140k over time if you go for the shorter loan.

Do you think if that math was spelled out to you when you were first looking for a house, and first researching loans, that it would have influenced your decision? Or, do you still only care about what your costs are per month?

Here is a mortgage calculator if you want to do some math.

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39 Answers

Adirondackwannabe's avatar

That’s one way to look at it. Or you can look at it like my nephew. “Why should I rent and make someone else rich.” Plus it’s still deductible if you can itemize.

JLeslie's avatar

@Adirondackwannabe Rent vs. mortgage is a reasonable calculation to do. People often fail to do the mortgage vs. no mortgage (no monthly fee for where you live, not including property taxes) calculation. If someone is a great investor the mortgage might be more profitable for them but if they tend to keep their money in a savings account, having no mortgage is usually way cheaper even considering you lose the tax write off.

Moreover, this question is not necessarily about rent vs mortgage, it is about which mortgage to get. But, all the factors and options count, I’m glad you brought it up. When my husband and I finally did a 15 year loan, the next house was when we could afford to buy outright. The equity built up fast on the 15 year loan house. We didn’t make any profit on that house, but we were able to pull out a lot of money. Paying a 30 year loan you barely pay into the equity the first few years, it is almost like paying rent, but not exactly of course. You still own the property and if it does increase in value you gain.

Adirondackwannabe's avatar

Or if you don’t know about the real estate marketplace you can get hosed big time. Real estate is easy to buy, hard to sell.

JLeslie's avatar

Depends where you live and the market there. Sometimes it is easy to sell and hard to buy.

Steering back to the question though, which is really about whether people realize how much a mortgage costs them.

Adirondackwannabe's avatar

We always had to disclose all of this when I was in lending. Amount of the loan, interest, and total of the payments. I still have my Comprehensive Mortgage Payment Tables book.

JLeslie's avatar

@Adirondackwannabe I forgot you were in banking. The sales spiel is the rent vs. mortgage deal. When did you disclose the total amount the mortgage will cost? I think the law only dictates it at the time of the signing of the loan. People don’t even know the true annualized rate until then. You think you are oaying 4.7%, but no, the paperwork all say 4.9%, or whatever it is. The good faith just discloses the monthly payments and closing costs, estimate of taxes and other related escrows.

Judi's avatar

I hate partnering with the bank but if you must, you also need to consider the value of the interest deduction you get on mortgage interest.
Since we decided we won’t take out loans our tax burden has sky rocketed. I still think we are better off not giving so much money to the bank though.

LuckyGuy's avatar

I wish more people would consider that. At least the interest rates on home mortgages are relatively low. Credit cards are notoriously high for some people. 22% even 29%! If paid at a minimum balance, a $1000 purchase will cost ~$2000 at the end of 3 years . Keep paying the minimum and it will cost you ~$4000 in another 3 years.
Some people don’t realize how expensive that TV, laptop, cell phone, pair of shoes…. really is.
If someone is only able to pay the minimum balance maybe they should not buy the item – or at least wait 6 months until they have some cash to reduce the loan amount.

Adirondackwannabe's avatar

@JLeslie We disclosed it at the commitment date and again at the closing, and there was a recision period if they wanted to change their minds. I also walked my customers through the documents so they knew what they were committing to. It is really slanted towards the banks.

JLeslie's avatar

@LuckyGuy The mortgage is more tricky because of the tax write off. A lot of people don’t know they can’t even itemize if the interest and property taxes don’t add up to enough, which means the often less educated first time home buyer doesn’t even get the tax break they might think they are getting. The truth is most people have no idea how the taxes work they just go along with the sales pitch. At least credit cards are a straight forward calculation if people bother to care to pay attention.

JLeslie's avatar

@Adirondackwannabe Did you make a higher commission on a 30 year loan vs. a 15 year?

ibstubro's avatar

Here’s my model, that has kept me debt free nearly all my adult life:

If you can afford the payment on a 15 year mortgage, get a 30 year loan and make the payment that a 15 year mortgage would have required each month. The difference will go directly against principal, meaning that you’re immediately paying on the loan rather than strictly interest.

Another upside it that your minimum loan payment is lower in case of emergency and you’re much less likely to lose your house.

I’ve bought 2 homes and a rental building and I’m debt free/semi retired @50.

Adirondackwannabe's avatar

@JLeslie I never worked on commission. I got my salary regardless of how I screwed a borrower. I think that sucks so bad what they do today.

JLeslie's avatar

@ibstubro If you get the 15 year loan to begin with you get a lower interest rate. Paying a 30 year off faster does not lower your monthly obligation, as you mentioned, many people don’t realize that. Sometimes the 30 year is better because of the lower monthly obligatin in case there is a bad month or more regarding finances, or maybe when first buying it was all the person could afford. We actually have never paid extra each month to reduce a mortgage amount. We just save the money and then when we feel good about our financial position and the math makes sense we just pay off the loan, rather than paying extra for many months or years. It has more to do with out personalities in my house rather than actual math I think.

The last mortgage I wanted a 15 year and my husband a 30 year, and I gave into him, but I still think it was a bad decision. He had his reasons, and I. Went along so he felt comfortable, but I really don’t see his logic, it was more emotional.

ibstubro's avatar

I took 30 year loans and any excess payment went directly to principal. My first house payment was about $225 a month and I unfailing paid $500 a month. I had the house paid off in 5 years. Had I taken a 15 year loan, my first 2–3 years of payments would have been on interest alone.

My second home, the banker was astounded that I would want a 30 year loan on the amount loaned. When she asked me why, I told her I was going to have the house pain within two years and I was just beating her out of interest. She thought about it a minute and said, “You’re right.”

Adirondackwannabe's avatar

When I bought my house no one was doing fixed rates, so I went with a five year fixed that converted to an ARM. And the first five years I paid an extra $100 a month on the payment. It knocked 200 bucks of the payment when it converted to the AR.

JLeslie's avatar

@ibstubro No. If you took the 15 year loan you usually pay less interest, even in the first year. Here is an even better calculator that shows the amortization of the loan. Remember to reduce the interest rate by at least .75 for the 15 year loan since that is what seems to be being offered now. You can pay early on a 15 year also.

FlyingWolf's avatar

It is spelled out for you when you first apply for a loan. It is a RESPA/Reg Z. When I worked in residential lending. it had to be sent to the borrower within three days of loan origination. These documents are also part of the final loan papers. They provide all kinds of information including the total amount paid if the loan goes the entire term, the annual percentage rate, and payments.

Every time I have bought I house I went into it knowing what the mortgage would cost. I also went In to each mortgage fairly certain that I wouldn’t have it for the full amount of time. Fifteen year mortgages are a great option for those who qualify. The problem is that, even with a lower interest rate, the payments are higher because the amortization term is so much shorter. Lenders have tightened up guidelines so much that qualifying is difficult so many people have to go with a 30 year loan in order to be able to buy a home.

JLeslie's avatar

@FlyingWolf I don’t remember the total cost of the loan being part of RESPA during the initial application. My memory could be horrible though. I should know, I am a licensed real estate sales person, but I haven’t sold real estate in a long time. I also just took out a construction loan that will convert at the end, and I reviewed loan documents for my FIL to refinance 6 months ago. Yet, I don’t remember seeing the total cost of the loan spelled out. I very easily could have overlooked it though. I was very focused on making sure there is no prepayment penalty more than anything. The total didn’t matter to me, because I know how that works and I do those calculations myself ahead of time anyway.

The final documents you sign off on at closing absolutely have ALL the real numbers, but there you are at closing. Not many people back out at closing. Closing is almost like being in prison. LOL. Houses are packed, delays cost money, expectations are high, etc, etc.

FlyingWolf's avatar

@JLeslie it might have changed since I worked in residential lending but we had to print a document that had boxes across the top with the loan amount, amount financed, APR, and total paid if the loan goes for the full term; it had to mailed to the applicant within three days of origination. I worked in lending in Southern California where home prices were ridiculously high and I remember some of the total paid numbers being absolutely mind boggling.

Maybe @Judi or @Adirondackwannabe are familiar with the current regulations and can say whether that form (or a version of it) is still sent at origination.

JLeslie's avatar

@FlyingWolf You absolutely could be correct. I ignored a lot of what was sent to me during the application process. I just also remember at closing some closing agents saying, ok, “here comes the shocking doment” and it was the form you described with the boxes across the top. So, in my mind that is the first time the borrower sees it. It will be interesting if I am dead wrong. It won’t surprise me.

syz's avatar

Yes, and yes. That’s why I have a 15 year mortgage and I always overpay it. Although I have such a good (fixed) interest rate now, it’s less critical.

Both times I have taken on a mortgage loan, I’ve had a very good lawyer who explained each line of each page before I signed.

FlyingWolf's avatar

@Adirondackwannabe IKR! I figured I could do some quick searching but when I got there I knew it would take hours and hours!

Adirondackwannabe's avatar

The regulations were bad when I was in lending, and I worked on the commercial side. I figured they could only get worse. But a lot of lenders put people in bad situations just so they can get a check. And some of the lenders were downright predatory.

JLeslie's avatar

@Adirondackwannabe Commercial usually assumes an experienced buyer.

Adirondackwannabe's avatar

You know what they say about assuming. I always walked them through the documents, to make sure they knew what they were signing.

FlyingWolf's avatar

@JLeslie I can speak for the residential side, and the regulations were incredibly onerous there too.

Judi's avatar

They can’t really give you exact numbers until they lock the interest rate and that could be some time after the initial application and very close to closing.

johnpowell's avatar

A few months ago I went up to my sister’s since my dentist is up there. They happened to have her son rip out a moldy bathroom. So I was helping him with that and we took a break to kill some beers on the porch.

We were talking about buying a house and how interest gets involved. He thought that it was 300K + (300K * .04) over the life of a 30 year loan. No clue about compounding interest.

He actually thought that with a 30 your loan he would only pay 312,000 over the life of the loan. Also convinced that inflation would make the house close to free. He has graduated college too. Maybe we need to make personal finance classes mandatory. Or at the least make realtors take ethics classes.

JLeslie's avatar

@johnpowell We have talked on fluther before about how high school should have a basic class that includes information about credit, mortgages, renting, taxes, making a budget, and other financial needs when out on your own. I personally think it should be part of a semester class that is reminiscent of Home Ec. Some schools have done away with Home Ec, but I think it is important. Every one should know how to read a basic recipe and cook some dishes. Basic considerations for not cross contaminating foods while preparing food. Do their laundry. Sew a button. Oh, and shake hands and hold a fork and knife properly. I guess it could be scrunched into a 9 week course.

johnpowell's avatar

@JLeslie :: My junior year in high school we had to do a year of personal finance. PF1 was all the stuff like credit cards and mortgages. PF2 was pretty much a macro/micro econ class. It is such a travesty these things aren’t required any more.

JLeslie's avatar

@johnpowell I didn’t have that, but I took accounting in High School as an elective, which taught me a little about taxes, and I learned about compound interest in elementary school or jr. high I think? Math class maybe? I don’t remember well. My major in college was Marketing, which is a business major so I had to take a year of finance. Obviously, in finance class we had to calculate the time value of money. We basically made the tables on tests, we didn’t get to use the tables. I still have a financial calculator, but it hasn’t had a battery in it for a few years. I wonder if it still works?

Judi's avatar

@johnpowell, I’m glad your city still had awesome schools when you went like it did when I went there.

FlyingWolf's avatar

My son who is in high school had a personal finance class where they discussed everything from buying car insurance to buying a house. Suddenly the boy was wondering how much interest his savings account was earning and which investments might give him a better return while keeping his money liquid. It was really a great class. In our middle school students are required to take a home ec class. They learned how to cook and follow a recipe, how to mend, do laundry, iron, etc. There was some finance tossed in there too. All in all a good and quite pragmatic curriculum.

JLeslie's avatar

No matter what my parents had discussed enough about money that I had the basics, but a formal class is really good reinforcement, and you learn things even the best parents either didn’t communicate well or the kid wasn’t paying attention well. So many adults suck at finances that obviously we cannot rely on parents.

@FlyingWolf Where do you live? That sounds very encouraging. Weren’t you interested in his interest rate in his savings account?

FlyingWolf's avatar

@JLeslie, my kids are in a public school in the Midwest. It was fun talking about his savings account. It was his own little account with chore money so it wasn’t enough to move it somewhere with a higher yield. His desire for more interest did spur him to start saving more which is a good thing.

JLeslie's avatar

@FlyingWolf A friend of mine teaches outside of St. Louis and they had a similar program. She was very I pressed with their schools system and the students. She had been born and raised and taught in MS outside of Memphis, and she said the schools in so many ways were like night and day, it was interesting to hear her talk about the differences and how she perceived them. It’s part of the reason I am in favor of some national standards, but I doubt any of the new national standards have anything to do with the type of class we are discussing. Just a guess, I don’t know, maybe they do?

Great that now he saves more and is more interested in money matters. Everythng counts. Money doubles in 15 years at 5% interest. Doesn’t matter if it is $200 or $200,000.

FlyingWolf's avatar

I have no idea if such a class is included in Common Core, but I hope it is.

I think with school budgets as tight as they are, and NCLB requiring schools to live and die by the test scores, most districts just don’t have the resources to put toward classes such as these. In my area we have two things going for us, one the district my kids are in is very well funded – residents actually approved a property tax increase to go directly to the school district, so they understand the importance; and two, one of the best known financial wizards around is from the area, is very philanthropic, and is a public school advocate and supporter.

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