Greg Privitelli for Buyers

the Cost of Your Loan

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Use your

numbers.

BORROWING MONEY COSTS MONEY

The "Foreclosure Crisis" and the "Mortgage Meltdown" is a result of home buyers NOT understanding the cost of a loan.

Aside from the emotions involved in the application and borrowing process, there are costs involved before you make a single monthly mortgage payment. You know of "fees" and "points". These costs are tallied into a lump sum. This sum can sometimes be built into the loan and paid off with your monthly payments or, typically, it is paid off at the time the loan is made. The sum adds up to a sizeable amount but this amount is very little compared to the interest cost.

EXAMPLE ONE (Fixed Rate):

You buy a $1,000,000 house with a 20% down payment.

You borrow $800,000.

You get a fixed rate 30-year loan at 6% interest.

FIXED RATE PAYMENT SCHEDULE (This is an Amortization Schedule.)

Event: Payment:

Interest:

Principal: Balance:

Loan - - - $800,000.00

Payment 1

$4,796.40

$4,000.00

$796.40

$799,203.60

Payment 2

$4,796.40

$3,996.02

$800.38

$798,403.22

Payment 3

$4,796.40

$3,992.02

$804.38

$797,598.84

Payment 4

$4,796.40

$3,987.99

$808.41

$796,790.43

Payment 5

$4,796.40

$3,983.95

$812.45

$795,977.98

Payment 6

$4,796.40

$3,979.89

$816.51

$795,161.47

Payment 7

$4,796.40

$3,975.81

$820.59

$794,340.88

Payment 8

$4,796.40

$3,971.70

$824.70

$793,516.18

Payment 9

$4,796.40

$3,967.58

$828.82

$792,687.36

Payment 10

$4,796.40

$3,963.44

$832.96

$791,854.40

Payment 11

$4,796.40

$3,959.27

$837.13

$791,017.27

Payment 12

$4,796.40

$3,955.09

$841.31

$790,175.96...

The payment amount is fixed for the life of the loan (360 months). The change associated to these payments is the amount that pays the interest (cost of loan) and the amount "paying down the principal" (principal = borrowed amount): the interest portion decreases and the principal portion increases.

This is "amortization".

EQUITY is the value of the house minus the amount owed (the balance) against it.

You valued your house at one million dollars and have a loan (of $800,000) against it. Before making your first payment you have $200,000 equity in your home.

Appreciation adds equity.

If interest rates drop substantially, you can get a cheaper loan by refinancing.

Depreciation removes equity.

Sit back and let the years pass. Historically, real estate is the very best investment to make money.

Take any date in history and count ten years forward. A real estate investment

made money 100% of the time.

Take any date in history and count forward five years. A real estate investment

made money 97% of the time.

Our country's economic decline and depreciation in housing prices is NOT the reason for so many foreclosures. However, the high number of foreclosures is closely related.

You must fully understand the cost of the interest for a loan before you sign.

Ask your loan officer to calculate an Amortization Schedule for the

worst possible future scenario in the life of your potential loan.

EXAMPLE TWO (Adjustable Rate):

You buy a $1,000,000 house with a 20% down payment.

You borrow $800,000.

You get an adjustable rate 30-year loan at 6% interest.

Only a 1/2 % rate increase raises the monthly payment $257.35.

Another 1/4 % rate increase raises the payment $128.04.

See where this is going? When the rise in percentage rate hits the rate cap (say 5 %), the monthly payments are $7,530.01 or, $2733.61 more expensive than the initial payments. For every payment!

ADJUSTABLE RATE PAYMENT SCHEDULE (Not all payments are shown.)

Event: Payment:

Interest:

Principal: Balance:

Loan

- - - $800,000.00

Payment 1

$4,796.40

$4,000.00

$796.40

$799,203.60...

Payment 6

$4,796.40

$3,979.89

$816.51

$795,161.47

Rate Change 1

The new rate is 6.5 %

Payment 7 $5,053.75

$4,307.12

$746.63

$794,414.84...

Payment 18 $5,053.75

$4,261.41

$792.34

$785,930.16

Rate Change 2

The new rate is 6.75 %

Payment 19

$5,181.79

$4,420.86

$760.93

$785,169.23...

Payment 30

$5,181.79

$4,372.43

$809.36

$776,511.10

Rate Change 3

The new rate is 7.00 %

Payment 31

$5,308.35

$4,529.65

$778.70

$775,732.40...

Payments before the first Rate Change are the same amount.

Rate Change happens according to YOUR loan terms.

After Rate Change the payment amount goes up (or down).

If the Index Rate that your loan follows continues up, your payments continue to get more expensive.

The Rate Cap is according to YOUR loan terms.

A defaulted loan is when a borrower misses a payment.

Three missed payments results in the bank foreclosing on the property.

Rising interest rates is the number one reason for defaulted loans. Home owners simply cannot meet the added expense of larger mortgage payments.

The change in amount of actual dollars and cents of any adjustable loan depends on the size of the loan and the percentage amount that loan may adjust.

The adjustable rate mortgage loan variables are:

Loan term (how many payments in total)

Beginning interest rate

Number of months before the first rate increase

Maximum amount the rate will increase at the first change

Number of months between subsequent rate increases

Maximum amount the rate will increase at each subsequent change

Rate cap (the highest percentage the rate may climb)