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What low interest rates really mean

By: 9 September 2011 2 Comments

We’ve heard it for the past couple of years – interest rates are near record lows, so you can save a pile of money if you buy a home now.

That sounds good, of course, but what does that actually mean to the average consumer? Let’s demonstrate how, exactly, those low interest rates can benefit home buyers. We’ll start with a mortgage for $150,000 and compare some interest rates.

Just a few years ago, an interest rate of 6.25 percent was considered quite low. That $150,000 mortgage – back then – would result in a monthly payment of $923.58 over 30 years on a conventional, fixed-rate mortgage. The total amount paid over the life of the loan would come to $332,489 – $150,000 would retire the principal amount and $182,488 would be in interest payments.

Let’s take a look at the same loan at 4.25 percent interest, which is the direction in which rates are trending right now. Under that scenario, the monthly mortgage payment would come to $737.91 for 30 years for a total of $265,648 over the life of the mortgage. In that case, the total amount paid in interest would come to $115,648.

The difference between the two interest rates is clear enough. The lower rate would result in a monthly payment that’s $185.67 lower than the loan under the higher interest rate and the consumer would save $66,849 in interest.

Justin Moore, immediate past president of the Mortgage Bankers Association of Arkansas, said one of the best things about low interest rates, however, has to do with 15-year mortgages. Simply put, more people can afford them right now than they could in the past and those will both retire debt quicker and cut down substantially on the amount of interest consumers pay.

Taking a look at that $150,000 mortgage, what happens to it when it’s financed for 15 years at 3.5 percent interest? The monthly payment comes out to $1,072.32 and the total amount paid on the mortgage is $193,018 – $43,018 of that is in interest.

Bear in mind that the monthly payments calculated in each of these scenarios does not include any amount put in escrow for insurance or property taxes. Additionally, there is no thought given to down payments and how much they could reduce the amount paid per month during the life of the mortgage.

Regardless, the savings available when mortgage rates drop is clear enough. Moore said the 15-year mortgage becomes a very attractive option when interest rates are as low as they are now. Consumers can look forward to getting out of debt earlier and paying considerably less interest over the life of a mortgage.

The point of all this, of course, is to demonstrate the advantages available to buyers when interest rates are hovering around historic lows. When one combines low interest rates with the consistent drop in housing prices we’ve seen, people in the market to purchase homes are in a very good position.

Home Sweet Home is written by Ethan C. Nobles and is sent weekly to publications throughout the Natural State on behalf of the Mortgage Bankers Association of Arkansas.

About: Ethan C. Nobles:
Benton resident. Rogue journalist. Recovering attorney. Email = Ethan@FirstArkansasNews.net.

2 Comments »

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