Mortgage Math Made Simple

You don’t need to be a math genius to calculate the cost of a home, especially in this era of online resources that instantly tell you how much you’ll pay over the life of a given loan. At Bankrate’s website, just enter the loan term, amount and interest rate and voila, you’ll see how much you pay during the entire span of the loan. Bankrate’s loan calculator will even tell you your monthly payment amount!

Examples from the real world

Keep in mind that in order to make this simple tool work, you’ll need to subtract out whatever down payment you intend to make. What the calculator refers to as “loan amount” should just include the dollar amount that will be getting financed, NOT the actual purchase price of the home. Below are a few examples to demonstrate how important interest rates are for borrowers. In each case, notice how just a half-percent change in interest rate causes the total cost of your loan to increase or decrease significantly. The change is even more pronounced on 30-year loans.

Example A: 30-year term @ 3.5 percent interest rate with $300,000 financed.

Monthly payment: $1,347

Total cost of loan: $485,000

Example B: 30-year term @ 3.0 percent interest rate with $300,000 financed.

Monthly payment: $1,264

Total cost of loan: $455,000 (That’s $30K less in total cost than example A, and $83 less monthly due to the half-percent lower interest rate!)

Example C: 15-year term @ 3.5 percent interest rate with $300,000 financed.

Monthly payment: $2,145

Total cost of loan: $386,000

Example D: 15-year term @ 3.0 percent interest rate with $300,000 financed.

Monthly payment:  $2,072

Total cost of loan: $373,000 (Compared to example C, this loan’s monthly payment is $73 lower and has a total cost reduction of $13,000)

Lessons learned?

All of which goes to show that your credit rating is a decisively important factor when it comes to buying a home. Because lenders will use your credit reports to set the interest rate they charge, your good credit will go a long way toward saving you many thousands of dollars over the life of a mortgage.

Make sure you check your credit reports and scores before setting out to buy a home. If there are issues or mistakes on any of your three reports, you can correct them. And even if you have less-than-perfect credit, there are ways to improve your score, given time and effort, so that you won’t get stung with a high interest rate on a mortgage.

 

 

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