The Hidden Advantages of Low Interest Rates in Achieving Your Homeownership Goals
Helping you accomplish your home goals! So, right now, a common thing being pushed is, regardless of what's going on, the good thing about buying a house right now is you're getting a low-interest rate.
Now, I've sold houses for a while, and I've, you know, especially first-time homebuyers, I've seen all kinds of interest rates, but I've never actually broken down and boiled down the actual benefits of a lower interest rate. When we look at interest rates normally, they're cute, right? 3%, 4%, 5%? This, it seems like, you know, a little chump change that your grandma will give you to go get some ice cream. And I'll go get some ice cream from the ice cream man or, and at least in my area, it was the corn man, right? But anyways, I want to actually break down the real benefits of having a lower interest rate and talk about what seems like a very complicated subject and kind of boil it down and break it down to see what it really means for your actual not only monthly payment but over the life of the loan.
A Detailed Analysis with a £300,000 Loan Example
So, in this scenario, I will use an example. In the example, I'm going to use a £300,000 loan amount. Now, there's a difference between the loan amount you take in a house versus the actual price you buy down. For example, if I buy a house for £320,000 and I put £20,000 down, my loan amount is £300,000. So, in this example, I will use that amount, £300,000. It's just an easy number to use. It can be less or more in your state. California people already type in the comments how cute it was I use 300,000.
First, let's break down what the actual interest rate does for your monthly payment, or I guess for your loan. So, using this example where we have a £300,000 loan and a 4% interest rate, here's what we do: if it's your first month where you're paying your first payment ever in the life, little-known, your loan amount's gonna be £300,000. What they do is they calculate basically the percentage rate, and they multiply it with your loan amount. So, in this case, if you get £300,000, you multiply by 4 percent, you get £12,000. So, what they do every month is they get the month's worth for that interest amount. So, in this case, £12,000 being the annual interest they get from you, divide that by 12, you get £1,000. So, the first month you make of a payment of a house, they're collecting a thousand pounds' worth of interest for them.
Understanding the Dynamics of Loan Repayment
So, now what's tricky here is there's always an amount being applied towards a principal. Now, in this case, using 4%, the number that is being used for the towards the principal in this scenario is £432. So, there's £1,000 being paid towards the interest, and there's £432 being paid through the principal. So, your loan amount will only go down £432. So, your new note, your new, new, so your new balance is gonna be £299,568. So, for the next month, what do they do? Well, now they use the new balance to figure out your annual interest amount. They divide that by 12, and then they get this number, which is, you're gonna see, hasn't really changed a lot.
So, it's slowly starting to get lower every month you pay it, but what's interesting to find out is that the interest and the principal number that was initially in the first payment, those always add up to the same number. So, as your interest rate is slowly, and I mean slowly, going down, your principal is also increasing very slightly. It always stays that amount, even the last payment you make. The last payment you make in this thirty years later is gonna be five pounds for interest and one thousand four hundred twenty-seven pounds towards your principal, regardless of the month and the time of it, it's always gonna be adding up to this amount. Why is it this amount? I don't know. I'm sure there's someone with the bigger brain that can figure that out.
A Comparative Analysis at Three Different Rates
So, now that you know how it works, I'd like to start breaking down three examples, okay? We're still gonna use three hundred thousand pounds as a loan amount, but I'm gonna break down with a difference between three percent interest rate, four percent interest rate, and five percent interest rate. So, each one of these scenarios is always gonna add up to one thing: you're gonna pay the three hundred thousand pounds that you originally borrowed back. That's gonna never change. That will always stay consistent because you borrowed three hundred thousand pounds. But what is that one point of interest really making?
Well, at five percent interest rate, once it's said and done, once you've lived in the house for thirty years, you would have paid over two hundred seventy-nine thousand seven hundred sixty-seven pounds' worth of interest, meaning you paid a total of five hundred seventy-nine thousand seven hundred sixty-seven pounds. That's right, it's double. I thought we were talking five percent, not fifty percent. Well, five is this true, so I kind of just, just working with, twerking, twerking of the numbers, working with the numbers a bit. So, after playing with the numbers for a bit, I wanted to find out what interest rate would actually make me pay double the amount that I borrowed in interest. Like, what is technically a fifty-fifty percent interest rate? And I found that that five point three one is the number that would literally make me pay three hundred thousand pounds in interest, three hundred thousand four hundred actually, and six hundred thousand four hundred in total. So, we're talking five percent and we're talking basically close to double. And as you can see there, the monthly payment is about sixteen ten forty-six. Now, that's, this is just a principal and interest, it doesn't include the taxes and insurances and whatnot.
So, when looking at four percent Interest, here's what we find: monthly payment goes down to fourteen thirty-two, which is not bad, that's like, what, like a hundred and seventy-eight pounds of monthly payment, about almost two hundred pounds, which isn't too bad, but you're noticing that the total interest rate goes down dramatically. If the math is correct, you're paying sixty-four thousand pounds less just for that one point of interest. Now, if you live in this house for thirty years, sixty-four thousand pounds is a lot of money.
Also Read : Why buying a house in the United States is so hard right now
And last but not least, at three percent, we're seeing the monthly payment go down to one thousand two hundred sixty-four pounds and eighty-one pence, and the total interest rate goes down to one hundred and fifty-five thousand three hundred and thirty-two pounds, producing about sixty thousand pounds of your total interest paid and a little bit under two hundred pounds of a monthly payment being paid. Yeah, we're looking at a difference of about a hundred twenty thousand pounds total over the life of the loan made out to the lender that you would have paid just for those two points of interest rate.