What My Dad Taught Me About Mortgages

When I was about 12 years old, my dad sat me down at a table in his office and asked me to help him with some of his end-of-the-year number-crunching. This happened in the very early ’80′s, long before PC’s revolutionized the way we do business.

My dad was a home builder. He worked hard (still does) and had saved his money (still does) and used it to help others by making loans so that qualified borrowers could buy a house for their family (he no longer does this…rates are too low).

My job was to use an adding machine (see photo) and run a total of the interest and principal that each borrower had paid on their loan that year. Dad made me double-check that the numbers on my tape matched the numbers on the mortgage amortization schedule for each loan. The typical borrower would make 12 payments a year. The unfortunate few would miss a payment here or there and be charged a late fee. And fewer still (the smart ones) would make additional advance principal payments during the year while only having to make 12 interest payments a year. By doing this they paid their loans off faster and avoided paying thousands of dollars in unnecessary interest.

While spending that afternoon punching in many lists of 12 numbers and double checking them on the adding machine tapes, I learned quickly how interest works against the borrower and for the lender. Have you ever learned this lesson? I’m so thankful that my dad taught me how amortized mortgage interest works.

Today’s interest rates are around 3.75% on a conventional 30 year fixed rate amortized mortgage. Check out the chart of the first year’s payments for a loan like that. And then imagine me, 12 years old, wanting to be with my friends playing Atari but instead sitting at a table next to my dad’s desk in his office, using an adding machine to run totals of each column of principal and interest. For the chart below, calculated on a $200,000 loan amount at 3.75% interest, each monthly payment equals $926.23.

Now look at the following chart, calculated at 4.75% interest, where each monthly payment equals $1,043.30. Earlier this year, most economists predicted that interest rates will rise to 4.75% by the end of 2013. That’s a significant increase in the cost to borrow the same $200,000. That’s why I think NOW is a good time to buy a house, if you have to borrow money to do it.

And then look at the next chart, calculated at 5.75% interest this time. The payment jumps up to $1,167.14 to borrow the same $200,000. Ouch.

And finally look at this next chart, calculated at 6.75% interest. Nobody knows the future of US monetary policy and not even the leaders of the Federal Reserve can predict the economy, but it’s safe to assume that we will again see interest rates in the 6-7% range in coming years. The payment on the same $200,000 borrowed is now a whopping $1,297.20. That’s $370.97 PER MONTH in additional interest that future home-buyers and borrowers will have to pay that today’s home-buyers and borrowers will not have to pay.  Because interest rates are now at generational lows, and because real estate prices are now as low as the are likely to ever be in our lifetimes, I tell everybody who will listen that NOW is the right time to consider your housing options.

Thanks, Dad.

--------------------------------------------------------------------------

Contact Scott Kelly at the Baird & Warner office on Central Street. 847-491-1855