Higher mortgage rates mean that the main course has subsided for a review

I remember when I wrote my mortgage myths, I pointed out that mortgage loans are not mostly interested.

But I did it as the mortgage rates were close to low levels, which may have skewed the answer.

It is true that for most of the past century priority loans have not been interested mostly. More has gone towards main payment than interest.

But now that interest rates are closer to 7%, this is no longer true if the loan is kept for maturity.

In addition, it means that it takes much longer for the principal to exceed interest rates monthly. Something you need to know if you are thinking about buying a home today.

Monthly mortgage payments remain the same but there is a shift in principal and interest

The way pantomortization works at a fixed interest rate you enjoy the same monthly payment each month for the entire loan period.

For example, consider a loan amount of $ 400,000 set at 6.75% on a 30-year-old fixed; The most important and interest payment is $ 2,594.39 per Month for 360 months.

It doesn’t change. However, the payment composition does. Because the loan balance shrinks every month with part of the payment that goes to the principal, you owe less interest the next month.

In short, less outstanding balance, less interest. Pretty straightforward concept.

When the mortgage rates were low, a huge part of the monthly payment went to the principal (because the interest rate was low).

As we all know, however, mortgage rates are not so low anymore. Gone are the days with 2-3% mortgage rates.

Instead, you may face a rate of 6.75%or even something in the 7s. Apart from having a higher monthly payment, much less of your payment goes to principal early.

And much more goes against interest as you have a higher interest rate.

Nearly 90% of your first priority payment goes to interest

Of the $ 2,594.39 in total, a staggering $ 2,250.00 goes to interest in month. In other words, about 87% of your total payment is interest!

Not good if you want to pay your mortgage anytime soon.

Contrast it to someone with a loan amount of $ 300,000 set at 2.65%. Their monthly would be $ 1,208.89 and the first payment would only be $ 662.50 in interest.

They would still pay less principal than interest in a while, but it would be much more balanced from Get-go.

We speak $ 546.39 in principal this month one that represents approx. 45% of the payment. This means that almost half of the payment is already going to repay the loan.

Instead of being pocketed by the mortgage lender as a profit!

What this means are those who bought housing five years ago at much lower request prices to start, enjoying much faster repayment of mortgage loans.

They benefit from smaller loan amounts, lower interest rates and a higher percentage of mortgages in each payment.

Meanwhile, recent home buyers who paid much more for the properties and who were saddled with much higher rates are coming to see repayment of mortgage loans basically will go through.

Imagine a rabbit and a snail, but the rabbit actually wins this one.

It can take 20 years for most of your monthly payment not to go towards interest!

In fact, it is only in the year 20 or so that these recent home buyers see the most important part of the payment exceeding interest.

This became aware of when Housingwires Mike Simonsen sent a nice graph of X, showing that 2021 home buyers (or refinancing) would hit that rocking point now.

So they already enjoy payments that are majority rector after only 48 months or so.

In the meantime, recent buyers will have to wait for two full decades to get there.

And overall, they will settle to pay more in interest than the original loan amount if the mortgage loan is kept until maturity.

Therefore, I recently wrote that if you are planning to buy a home today, you can expect to keep it much longer.

Essentially, your mortgage loan is much slower thanks to the higher interest rate.

At the same time, house prices are undoubtedly quite high and are not expected to go up a ton any time soon.

Overall, you have a situation where if you put down a bit, says 3.5% with an FHA loan, you may need more time before you can sell again.

Remember that transaction costs can be pretty steep, as high as 10% of the sale price to unload between taxes, title, escrow and real estate commissions.

So home buyers today have another disadvantage except having to accept a much higher priority rate and purchase price.

Something to consider if you buy today. You cannot buy on a whim and expect to sell for a fat profit of 12 months.

There is now a stronger argument to pay extra each month

With these changes comes the argument of paying extra against the mortgage loan every month.

After all, it is no longer a screaming agreement to keep your mortgage on the full 30 years.

Yes, mortgage loans are considered good debt, but a little less good when interest rates are 6-7% or higher.

To combat this, you can pay extra every month or you can create your own free every week -mortgage payment system.

In the process, you can speed up the repayment of your mortgage loan while reducing interest expenses.

This can do that so that your home loan acts as a mortgage, and if you pay enough, you need to get the principal to exceed interest rates.

Not only on a monthly basis, but also over the entire loan period.

For example, pay an extra $ 500 per Month using my example from above and you will pay more to the principal, starting this year nine.

And the total interest rate would be around $ 316,500, less than the $ 400,000 borrowed. Instead of it being over $ 530,000 in interest!

Read on: Do I have to pay my priority loan early?

Before creating this site, I worked as a banking director of a wholesale loan in Los Angeles. My practical experience in the early 2000s inspired me to start writing about mortgage loans 19 years ago to help potential (and existing) home buyers better navigate the home loan process. Follow me on x for hot take.

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