Interested in Interest?

One of the most talked about, but perhaps, least understood elements in purchasing and owning a property is mortgage loan interest rates.  Obviously, if you’re able to purchase a property with cash, you don’t have to worry much about interest rates, although, they will still have an effect on the housing market.  How?   Well, mortgage interest rates are indicative of the cost to borrow that money.  When interest rates are down, the cost to borrow that money is low, which, in turns incentivizes buyers into the market.  More buyers in the market = more demand = increasing home prices. 

The opposite is similarly true: higher interest rates = costs more to borrow = fewer buyers = reduced demand = housing prices decrease.  Now, obviously, there are more factors to a particular markets housing prices, but this theory will hold true, given enough time, and substantial change in the interest rate.  With Portland real estate being so hot over the past couple years, a relatively small increase in interest rates probably won't have much impact on driving prices down.

In general, we have been in quite a competitive place with interest rates over the past few years, with rates ranging from the low 3s to mid 4s.  Compare that to the average rate in 1981 of 16.64%!!  In fact, the 30 year fixed rate didn’t get below 10% Between 1980 and 1990, and still hasn’t risen above what it was in 2007-08.

So how does the interest rate affect my payment?  Mortgages are amortized over the life of the loan, typically being 15 or 30 years.  The lender calculates the entire amount of interest that would accrue monthly over those thirty years, and then creates an amortization schedule.  The amortization schedule creates a single payment amount that doesn’t change, regardless of how much principal remains unpaid in the loan.  The mortgage company front-loads the interest being payed in your monthly payment, meaning that your payments don’t contribute to your equity in the property in a large degree until much further into the process.  The interest or finance cost of the property is calculated monthly, so there are essentially 360 instances of interest compounding during a 30 year loan.  

Still confused?  Yeah, it’s a bit complicated, but what you should know is that most loans allow for borrowers to pay more than their monthly payment, and apply the extra toward their principal balance.  This will not reduce your monthly payment, but will help you to reduce the amount of overall payments.  

If you are planning a purchase, and need a mortgage contact, we have a few great contacts to share with you.  Give us a call or email right now!