Mortgage Rates – Holy Crap!

In this article I get a dose of reality about mortgage rates and buying houses, and share my findings with the world.I periodically get emails from Zillow telling me about houses nearby and whether they’ve price dropped. I got one recently for a house that’s currently on the market for $72,500. I thought, wow, what a great deal! I wonder what that would cost me per month? So, just for fun, I decided to go use a mortgage calculator to find out what that type of mortgage would cost me per month. Mortgage rates today, per The Washington Post, are 3.59%. I put 4% into the calculator just to be safe. It gave me a figure of $346.13 per month for 30 years.

I thought wow, that’s not too bad, that’s like a third of my rent. Then I wanted to know how much interest I’d actually be paying, so I took a look at the amortization schedule and what I saw was disgusting. I was appalled. This was a huge slap of reality and adulthood right to the face for me.

Now, let me preface this article by letting you know that I don’t know that much about buying houses or mortgages (which is probably why I was disgusted by the following figures). I just wanted to share this valuable learning experience with the world.

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As you can see by the image above, I would be paying $346.13 per month, of which around $105 would be principal and $240 would be interest. Over the course of the mortgage, I would be paying $124,606.80 total. That means $72,500 for the house and a whopping $52,106.80 for interest! Holy shit! That interest is almost 72% of the price of the house!

Now, let’s play around with some other numbers. Let’s say I have a 20% down payment ($14,500), which brings the price down to $58,000. This brings my monthly payment down to $276.90, of which ~$83 is principal and ~$193 is interest. The loan over 30 years will cost me $100,764, which means I’m paying $42,764 in interest, or ~59% of the price of the house. That’s better, but still appalling.

Since the house is so cheap, maybe I can pay it off in 15 years instead of 30. After all, the initial payment was only around 30% of my current rent, so I can afford to pay more each month. First, I’ll go with the initial numbers of $72,500 with no down payment. My new monthly payment is $536.27. Still a pretty good deal, in terms of affordability per month. I’d now be paying ~$294 towards the principal and ~$241 towards interest. Over the course of the loan I’d be paying $96,528.60, of which $24,028.60 would be interest. That’s 33% of the price of the house. This is starting to sound like a much better deal, but I still can’t believe that I’d be paying over twenty thousand dollars in interest alone.

Finally, let’s calculate a 15 year mortgage with a 20% down payment (so a total of $58,000). My new monthly payment is $429.02, of which ~$235 is principal and ~$193 is interest. The course of the loan would cost me $77,223.60, of which $19,223.60 is interest. That’s 26.5% of the price of the house. Much better than the previous numbers, but still a lot of money.

Of course, all of these figures assume that you’re only paying the minimum each month. You could pay much more and pay the loan off much sooner (thus paying less interest). Still, I can’t believe how much money on a mortgage goes toward interest, especially on a cheap house and especially if you opt for a 30 year fixed mortgage instead of a 15 year. If only it were more realistic to just save up and pay cash for a house.

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