How is mortgage interest rate calculated?

[Josh_LA]

Let's say, I want to loan $100K
@ 5%, for 30 years.

Does that mean,

1.
I owe $105K total in 30 years no if, and or but?
If so, does that mean the minute I pay off $5K, I only owe $100K for the rest of the time, nothing more?

or
2.
I owe 5% every year for whatever is left.
So year 1, I owe $105k, I pay off $15k
Now I owe $90k + 5% = $94.5K
Next year, I pay 15K again, so $79.5 K left
$79.5K + 5%= $83.4k.............
So in 2 years, I paid $30k and still owe $83.4K

or is there a 3rd way?

[Met Income]

If you pay 5K off, you still owe them 95K, so you'd pay 5% on 95K, not 100K.

[Josh_LA]

If you pay 5K off, you still owe them 95K, so you'd pay 5% on 95K, not 100K.

but don't you owe interest right off the bat?

The point is, do you owe 5% every year?

Or one time deal?

[Met Income]

but don't you owe interest right off the bat?

The point is, do you owe 5% every year?

Or one time deal?

No, you pay 5% on a year's worth of what you owe. 100K for a year would be $5,000 if interest is calculated annually. Monthly, it would be a little more.

[brandon]

What do you think, use your head a little....

[Josh_LA]

No, you pay 5% on a year's worth of what you owe. 100K for a year would be $5,000.

Ok, then wouldn't that be scenario 2?

Where 5% is added on top of whatever you still owe?

[Josh_LA]

What do you think, use your head a little....

I think scenario 2 sounds right

or else people wouldn't bother with RATES, whether its 5% or 10%, if its a one time deal, you only pay it once and never think about it again.

[brandon]

I think scenario 2 sounds right

or else people wouldn't bother with RATES, whether its 5% or 10%, if its a one time deal, you only pay it once and never think about it again.

There ya go!

[Josh_LA]

No, you pay 5% on a year's worth of what you owe. 100K for a year would be $5,000.

So are you saying

They take 100K
divide it by 30 years
$3.33K a year + 5%
and I owe $3.50K every year?

[brandon]

http://en.wikipedia.org/wiki/Annual_percentage_rate

[Josh_LA]

There ya go!

so is it not laughable when people take mortgages where the banks say

"Just pay interest the first 3 years"

Unless they mean "so you no longer owe a penny more in interest"
What they mean would be
"So you paid nothing these 3 years, you still owe us your mortgage plus interest"

[Met Income]

So are you saying

They take 100K
divide it by 30 years
$3.33K a year + 5%
and I owe $3.50K every year?

It's rolling, you'd pay $537/mo and more of it would go towards principal each month.

If I could add attachments, I'd show you my amortization table from the software I have.

[Johnnybags]

93255.78 is total interest for 30 years.

Do not forget prop taxes of 2-3 grand a year, 1k for insurance etc.

run an amortization schedule for details

[Josh_LA]

It's rolling, you'd pay $537/mo and more of it would go towards principal each month.

If I could add attachments, I'd show you my amortization table from the software I have.

can you take a screenshot and put it on pixpipeline.com?

then since you know how to do mortgage interest, you can probably decide whether you should buy a house

[Josh_LA]

93255.78 is total interest for 30 years.

Do not forget prop taxes of 2-3 grand a year, 1k for insurance etc.

run an amortization schedule for details

I see.

So you owe double in 30 years (or even per month)

Then, aside from the obvious way to put more money in ASAP.

How else can you "beat" the rate of interest from increasing your debt?
Are there deals where you can pay off interest and no longer pay interest?

[Met Income]

http://pixpipeline.com/l/9e61bb6e7841.jpg

[Met Income]

I see.

So you owe double in 30 years (or even per month)

Then, aside from the obvious way to put more money in ASAP.

How else can you "beat" the rate of interest from increasing your debt?
Are there deals where you can pay off interest and no longer pay interest?

You can't, it re-calcs based on the balance owed whenever you accrue interest (usually monthly).

Note that a 5.0% interest rate compounded monthly is actually an effective rate of 5.116%

[Josh_LA]

You can't, it re-calcs based on the balance owed whenever you accrue interest (usually monthly).

Note that a 5.0% interest rate compounded monthly is actually an effective rate of 5.116%

thanks, the table was very helpful.

So the best way out is to pay $1000, $2000 or whatever you can, so the interest can only be added to the remaining balance?

[Josh_LA]

So now my question is

If I committed to 30 years, 5%
I'll ultimately pay $100K principal
$93K interest.

Does that mean no matter when I pay if off I still owe then $190K total?
Or, if somewhere near the begining (say, 6 months), I found $100K, I can pay it off and forget the $90K interest?

[Met Income]

So now my question is

If I committed to 30 years, 5%
I'll ultimately pay $100K principal
$93K interest.

Does that mean no matter when I pay if off I still owe then $190K total?
Or, if somewhere near the begining (say, 6 months), I found $100K, I can pay it off and forget the $90K interest?

Some banks have penalties for pre-payments, but if yours doesn't and you found 100K, you pay off the loan (which would be less than 100K) and you walk away. You pay your interest with every payment. You don't owe 193K, you just owe the loan balance (100K and decreasing) plus the interest every month.

[Josh_LA]

Some banks have penalties for pre-payments, but if yours doesn't and you found 100K, you pay off the loan (which would be less than 100K) and you walk away. You pay your interest with every payment. You don't owe 193K, you just owe the loan balance (100K and decreasing) plus the interest every month.

Cool.

then I think you answered me, and answered yourself as to whether you should buy a house, haven't you

I still like to hear your take back at your thread.

thanks!

[Josh_LA]

thanks for the answers

I used this
http://www.amortization-calc.com/

And I think if people realized how they can save by walking away in 10 years rather than 20 or 30, they'd really think twice about paying their minimum monthly.

[Met Income]

thanks for the answers

I used this
http://www.amortization-calc.com/

And I think if people realized how they can save by walking away in 10 years rather than 20 or 30, they'd really think twice about paying their minimum monthly.

Ya, paying off your mortgage is a guaranteed rate of return of the interest rate (less interest tax deductions).

If your rate is 5.0% and you're in the 25% bracket, you earn (5.0 * .75) = 3.75% risk-free return on the pre-payment. If in a boom market, stocks earn more, but they aren't now. And in a low interest rate environment, new bonds won't earn that much and they have default risk. My friggin HSBC online money market acct is as competitive as it gets for its sector, and it's decreasing to 1.6%.

[Josh_LA]

Ya, paying off your mortgage is a guaranteed rate of return of the interest rate (less interest tax deductions).

That's the point I was trying to make earlier, even interest rate tax deductions & property tax become 2ndary when you can actually pay off principal and be debt free ASAP.

If your rate is 5.0% and you're in the 25% bracket, you earn (5.0 * .75) = 3.75% risk-free return on the pre-payment. If in a boom market, stocks earn more, but they aren't now.

In a boom market, you better have time to play stocks yourself, or else if you leave it to a broker, they'll take most the money, won't they?

And in a low interest rate environment, new bonds won't earn that much and they have default risk. My friggin HSBC online money market acct is as competitive as it gets for its sector, and it's decreasing to 1.6%.

but like I said earlier, whether its high interest at 8%, or low interest at 2%, isn't it irrelevant if you can pay off your principal (or if you can find a buy, which is 30-40% off what you expected to pay in a boom)?

[Johnnybags]

and its paid off in 20 years vs 30 and saves you a ton of money.

[Josh_LA]

and its paid off in 20 years vs 30 and saves you a ton of money.

no kidding

I wonder if most people who sign a mortgage actually know this math.

[Johnnybags]

no kidding

I wonder if most people who sign a mortgage actually know this math.

they never think of it. Josh, curious, how old are you? I'll bet you are fairly young and have learned more on these forums than all previous schooling years combined about how the world works? NO?

[Josh_LA]

they never think of it. Josh, curious, how old are you? I'll bet you are fairly young and have learned more on these forums than all previous schooling years combined about how the world works? NO?

same age as Met Income

Yes, I learn more from Ron Paulers and dropouts than in school about life and money.

[ItsTime]

If people actually stopped to think about how much money they are wasting on interest they would never take out a loan again.

[Johnnybags]

same age as Met Income

Yes, I learn more from Ron Paulers and dropouts than in school about life and money.

for doubling your money. That is take the number 72 and divide by your rate of return to get how many years it takes to double. 72/3 percent tbond takes 24 years to double your money. 72/15 percent return takes less than 5. Also a 50 percent loss in the stock market takes 100 percent gain to breakeven.