Thursday, September 22, 2011

Mortgage Rates and Calculations

If you follow the financial markets, you may have heard that the Federal Reserve took action to help the economy recently.  One part of the plan is to help keep mortgage rates low.  In fact, mortgage rates have hit lows not seen since 2009.

So Where Are Rates and Where Have They Been (and Where Are They Going)
I've mentioned on several posts where you can go to check mortgage rates.  These include Bankrate, Mortgage News Daily, or even the website of you local bank.

To get a sense of where rates have been recently, Mortgage News Daily puts together a chart here.

Rates are low and it is a great time to take out a mortgage, but I don't think you need to rush.  In order to spur the economy, and also to allow the government to refinance its own debt (a significant portion of which come due in the next few years), I believe rates will stay low for quite some time.

So now that you've got a sense of where rates are, how can you use that to figure out how much you'll pay each month?

Spreadsheets You Can Play With
I've created a spreadsheet with an Comparison tab and an Amortization tab.  Click here and you can make a copy of this spreadsheet for yourself.

The highlighted and bolded cells are the ones you should look to change.

The Comparison tab is built for just that purpose - you can play around with different purchase prices, down payments, interest rates, and mortgage terms.  This can be very helpful in your budgeting.  Once Pamela and I had made an offer, we used this spreadsheet to see how much our monthly payment would go up if we raised our offer by $5,000.

Once you have an offer accepted and you know the purchase price, you can change the interest rate cells to see how your monthly payment will changed based on the rate you get.

The Amortization tab shows you how your monthly payment will be split over the life of the loan.  You'll notice that early in the loan, you'll be paying a lot more interest.  As the balance of the loan goes down, those interest rates shrink and more of your payment goes towards paying down the loan balance.

The Additional Payment column is really insightful.  How quickly can you reach 20% equity or pay down your loan completely if you can add $100 to your monthly bill.

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