The mortgage lending industry is much in the news right now, and has been for a couple of years. But I suspect that many of us haven't sat down to study mortgages closely. For a while, our inboxes were filled with mortgage refinancing offers. And many of us engaged in serial refinancings, some taking out cash, some simply to lower their rate. Those who are comfortable with a spreadsheet can noodle the numbers with relative ease. But I thought I'd present some data from my own spreadsheet analyses.

This is the first of a series. It looks at simple 30 year fixed rate mortgages.

I've compared a range of rates, from 4.0% to 7.0%. This range may seem quite ordinary to those in the market in the past few years, but are quite a bit below what home buyers were paying in the early 1980s. My examples here will work with 4%, 5%, 6% and 7%. I've assumed principal of $100,000 and a 30 year fixed rate mortgage; if typical mortgages in your neighborhood are higher, simply multiply all by whichever whole number seems best.

1. Monthly Principal and Interest Payment per $100,000 of principal:

- At 4%, $477
- At 5%, $537
- At 6%, $600
- At 7%, $665

2. Allocation of first payment:

- At 4%, 30% of one's first mortgage payment is principal, 70% is interest. ($144 principal and $333 interest)
- At 5%, 22% is principal, 78% is interest. ($120 and $417)
- At 6%, 17% is principal, 83% is interest. ($100 and $500)
- At 7%, 12% is principal, 88% is interest. ($ 82 and $583)

3. Allocation of the 12th payment:

- At 4%, 31% of the 12th monthly payment is principal, 69% is interest

- At 5%, 23% of the 12th monthly payment is principal, 77% is interest
- At 6%, 17% of the 12th monthly payment is principal, 83% is interest
- At 7%, 13% of the 12th monthly payment is principal, 87% is interest

4. At the end of 1 year,

- At 4%, you've paid off 1.8% of the principal

- At 5%, you've paid off 1.5% of the principal
- At 6%, you've paid off 1.2% of the principal
- At 7%, you've paid off 1.0% of the principal

5. At the end of 1 year, for each $100,000 borrowed, you've paid interest of

- At 4%, $3,968

- At 5%, $4,966
- At 6%, $5,967
- At 7%, $6,968

6. At the end of 3 years,

- At 4%, you've paid off 5.5% of the principal

- At 5%, you've paid off 4.7% of the principal
- At 6%, you've paid off 3.9% of the principal
- At 7%, you've paid off 3.3% of the principal

7. Allocation of the 36th payment:

- At 4%, 33% of the 36th monthly payment is principal, 66% is interest
- At 5%, 26% of the 36th monthly payment is principal, 74% is interest
- At 6%, 20% of the 36th monthly payment is principal, 80% is interest
- At 7%, 15% of the 36th monthly payment is principal, 85% is interest

8. At the end of 3 years,

- At 4%, you've paid interest of $11,686 and built your equity by $5,501

- At 5%, you've paid interest of $14,669 and built your equity by $4,656
- At 6%, you've paid interest of $17,668 and built your equity by $3,916
- At 7%, you've paid interest of $20,678 and built your equity by $3,273

9. At the end of 5 years, on that $100,000 mortgage

- At 4%, you've paid down the mortgage by $9,552 and paid interest of $19,092

- At 5%, you've paid down the mortgage by $8,171 and paid interest of $24,038
- At 6%, you've paid down the mortgage by $6,946 and paid interest of $29,027
- At 7%, you've paid down the mortgage by $5,868 and paid interest of $34,050

10. Allocation of the 60th payment:

- At 4%, 37% of the 60th monthly payment is principal, 63% is interest
- At 5%, 29% of the 60th monthly payment is principal, 71% is interest
- At 6%, 22% of the 60th monthly payment is principal, 78% is interest
- At 7%, 17% of the 60th monthly payment is principal, 83% is interest

11. After 10 years,

- At 4%, you've paid down the mortgage by $21,216 and paid interest of $36,074
- At 5%, you've paid down the mortgage by $18,658 and paid interest of $45,761
- At 6%, you've paid down the mortgage by $16,314 and paid interest of $55,632
- At 7%, you've paid down the mortgage by $14,188 and paid interest of $65,649

12. Allocation of the 120th payment:

- At 4%, 45% of the 120th payment is principal, 55% is interest
- At 5%, 37% of the 120th payment is principal, 63% is interest
- At 6%, 30% of the 120th payment is principal, 70% is interest
- At 7%, 25% of the 120th payment is principal, 75% is interest

At the lowest rate you give (4%), you pay back somewhat over $100,000 (about $112,000) in interest payments over the thirty year life of that loan....it's STILL a "good deal" because (1) those interest payments are what motivates lenders to lend large sums of money over long periods, (2) makes borrowing such huge sums doable for the vast majority of people...in short, it's the ONLY game in town" and one that benefits BOTH lenders (who take on a fair amount of risk over a long period) AND borrowers who get to borrow huge sums over such periods for such large purchases.

It is up to the borrower to DO THE MATH.

We must know what those payments coupled with property taxes, utilities and our other living expenses will leave us out of our monthly NET (after tax) income.

It's not that hard to do that basic math and home ownership is worth the sacrifices in virtually every respect.

Posted by: JMK | September 25, 2008 at 06:12 PM

4% loans aren't always available, at least for 30 years fixed.

I'm glad you think it is a good deal. I think there is a better way; I'm working up to it, as time permits.

When interest rates from from 5% to 4%, who benefits? (I'm expecting that you'll say that it is the potential borrower.)

Posted by: LVTfan | September 26, 2008 at 05:16 PM