Buying becomes more attractive. . . especially when you can afford the bigger home
Most people know that the lower your mortgage interest rate, the less money you waste in interest payments to the bank. However, did you realize the lower your mortgage rate, the faster you build equity in your home
Let's say our friend in Hoboken is currently paying $1,000 a month in rent, and would rather spend that $1,000 a month on a mortgage payment instead (I know, you'd be hard pressed to find a $1,000 Hoboken rental but work with me, it's a nice round number). If he got a 30-year fixed-rate mortgage at 7%, that would cover a $150,000 loan. Since $1,000 a month for 360 months works out at a total of $360,000 in mortgage repayments, on average about 42 cents of his mortgage-payment dollar will go towards building equity. What's more, most of that is back-ended: after five years, he will have paid down his principal amount outstanding by just $8,820.64, or less than 15% of his total payments.
On the other hand, a $1,000 payment on a 30-year fixed-rate mortgage at 4.5% would cover a $200,000 loan -- which means that 56 cents of every dollar you spend on your mortgage goes towards equity. And after five years, he will have paid down his principal amount outstanding by $17,450.82, which is 29% of his first five years' payments.
So yes, the house is $50,000 more expensive, but it's just as affordable, and you're building up more equity, not less, with the lower mortgage rate. If you look at an amortization curve for a high-interest-rate mortgage, it starts off pretty flat: most of your mortgage payments are going to interest. The lower that mortgage rates fall, the more equity you build up in the early years.
Let's say our friend in Hoboken is currently paying $1,000 a month in rent, and would rather spend that $1,000 a month on a mortgage payment instead (I know, you'd be hard pressed to find a $1,000 Hoboken rental but work with me, it's a nice round number). If he got a 30-year fixed-rate mortgage at 7%, that would cover a $150,000 loan. Since $1,000 a month for 360 months works out at a total of $360,000 in mortgage repayments, on average about 42 cents of his mortgage-payment dollar will go towards building equity. What's more, most of that is back-ended: after five years, he will have paid down his principal amount outstanding by just $8,820.64, or less than 15% of his total payments.
On the other hand, a $1,000 payment on a 30-year fixed-rate mortgage at 4.5% would cover a $200,000 loan -- which means that 56 cents of every dollar you spend on your mortgage goes towards equity. And after five years, he will have paid down his principal amount outstanding by $17,450.82, which is 29% of his first five years' payments.
So yes, the house is $50,000 more expensive, but it's just as affordable, and you're building up more equity, not less, with the lower mortgage rate. If you look at an amortization curve for a high-interest-rate mortgage, it starts off pretty flat: most of your mortgage payments are going to interest. The lower that mortgage rates fall, the more equity you build up in the early years.
Labels: Hoboken apartment, Hoboken Condo, Hoboken Real Estate, Hoboken real estate market, Hudson County condo, Hudson County real estate, Mortgage rates, rent vs buy
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