Need Math Help (Mortgage Related)

**monkeywrangler71** · 12-29-2011, 01:10 PM

The interest rate could be anything in 4 years. When I bought my first house in 1997 we were told the same thing, but rates didn't go up, they went down and they stayed down. No one knows what will happen in the future, don't listen to anyone who says they do. This is a sales push that bankers use to make people think they need to act fast.

Are the payments the same on these two options? I didn't look at your math, just your logic. I'm going to go do the calculations. How do you pay? Bi-weekly?

QM · 12-29-2011, 01:26 PM

Originally Posted by monkeywrangler71

The interest rate could be anything in 4 years...No one knows what will happen in the future, don't listen to anyone who says they do. This is a sales push that bankers use to make people think they need to act fast.

I know that the interest rate could by anything in 4 years. I'm not listening to the predictions...I just want to know if the rate is X in 4 years, then it's best to go with the 4-year fixed OR if the rate is X in 4 years, then it's best to go with the 5-year fixed. I'm not acting fast...if I was then I would have signed the papers already.

I want to look at all possible angles and see which makes the most sense.

Originally Posted by monkeywrangler71

Are the payments the same on these two options? I didn't look at your math, just your logic. I'm going to go do the calculations. How do you pay? Bi-weekly?

We pay bi-weekly.
As per the online "Mortgage Payment Calculator" thru our bank, IF we were to go with the 11 year amortization with the 4-year fixed at 3.15%, then our payments would be $483.90 every 2 weeks. IF we were to go with the 11 year amortization with the 5-year fixed 3.50%, then our payment would be $492.66.

**monkeywrangler71** · 12-29-2011, 01:32 PM

Biweekly payment at 3.19%: $ 484.90
Biweekly payment at 3.5%: $ 492.66

Payment amount X 26 weeks X 4 years: total paid

Total paid @ 3.19 - $50 429.60
Total paid @ 3.50 - $51 236.64
Difference: $807.04

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Outstanding balance @ 3.5: $69,065.16
Outstanding balance @ 3.19: $68,763.88
Difference: $301.28

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Interest cost over 4 years @3.5: $ 12,338.80
Interest cost over 4 years @3.19: $ 11,230.48
Difference: $1108.32

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The $1108.32 in interest is your actual savings over 4 years - $301.28 of that is going to the principal of the mortgage, $807.04 is staying in your pocket because of the lower payment.

Will be back in a minute with year 5.

**monkeywrangler71** · 12-29-2011, 01:51 PM

Year 5 at 3.5%:
Total paid: $12,809.16
Total interest: $2,214.57
Outstanding principal: $58,470.57

Year 5 at 4.5% (new payment $477.25 biweekly)
Total paid: $12,408.50
Total interest: $2,849.79
Outstanding balance: $59,205.17

Year 5 at 5.5% (new payment $493.06 biweekly)
Total paid: $12,819.56
Total Interest: $3,481.31
Outstanding balance: $59,425.63

Year 5 at 6.5% (new payment $509.12 biweekly):
Total paid: $13,237.12
Total interest: $4,111.96
Outstanding balance: $59,638.72

-------------------------

Difference in interest paid is the only number that matters - that is your actual cost. None of the above scenarios is any more likely than another, but you can see that in the low 5's you've used up the surplus gained with the lower rate from the first four years.

So, a five year term is essentially a $1108 bet that interest rates will go above 5.3% (or a 4 year term is a bet that they won't).

QM · 12-29-2011, 02:00 PM

Wow! I'm amazed, MonkeyWrangler71! How did you do all those calculations so fast? That would have taken me a year to do...let alone figure out! Thanks so much!

Based on what you've shown me, I think the 4 year at 3.19% is the better option since I'm guessing (and only guessing) that the interest rates won't go above 5.3% in the next 5 years. Do you concur?

**Greebo** · 12-29-2011, 02:11 PM

/me hires MW as his official stand in

**monkeywrangler71** · 12-29-2011, 02:14 PM

I would never dare predict the future, especially with someone else's money

Just be comfortable in whatever decision you make.

QM · 12-29-2011, 02:15 PM

Originally Posted by Greebo

/me hires MW as his official stand in

Awwwwwww....Darn! You mean you won't hire me as your official stand in for mortgage consulting?!?! Hahahahaha!

QM · 12-29-2011, 02:17 PM

Originally Posted by monkeywrangler71

I would never dare predict the future, especially with someone else's money

Just be comfortable in whatever decision you make.

Understood! Thanks again for helping me!!

You and Greebo are the best "Debt Reduction & Money Management Helpers" there is!

QM · 12-29-2011, 02:30 PM

MonkeyWrangler...I hate to use and abuse your goodwill, but.......IF I could put $142.50 every week onto the mortgage does this change the totals and interest dyrastically one way or the other. Would the same statement, "So, a five year term is essentially a $1108 bet that interest rates will go above 5.3% (or a 4 year term is a bet that they won't)." still apply?...just with different numbers? Do you know what I'm asking?

**monkeywrangler71** · 12-30-2011, 04:10 PM

If you put an extra $285 on each bi-weekly payment, the savings for 3.14% over 3.5% goes down to about $915 over 4 years. Basically, the more you put directly on the principal, the less important the interest rate difference becomes.

For either case, the total interest cost for the term drops by about $2000, the outstanding balance on the principal after 4 years will be in the $37K range, and it would be paid off at some point in year 6.

Just to clarify the above - the $2000 interest savings is just in the first 4 years with the extra payment, the total savings by paying it off 5 years early would be about $7000-8000.