When I wrote about mortgage myths, the landscape looked different. Mortgages weren’t primarily interest payments, especially with historically low rates. However, times have changed, and the reality is shifting.
Here’s what you need to know:
1. Monthly Mortgage Payments Stay the Same, But There’s a Shift in Principal and Interest
- While your monthly payment remains constant, the distribution shifts.
- With higher interest rates, a smaller portion of your payment goes towards the principal early on, resulting in more interest paid upfront.
- This means that recent home buyers are seeing a slower rate of mortgage repayment compared to those who bought when rates were lower.
2. Nearly 90% of Your First Mortgage Payment Goes Toward Interest
- With a $400k loan at 6.75%, a significant chunk of your initial monthly payment is interest.
- This front-loaded interest payment can delay the payoff of your mortgage significantly.
- In contrast, lower interest rates result in a more balanced allocation towards principal right from the start.
3. It Can Take 20 Years for the Majority of Your Monthly Payment to Not Go Toward Interest!
- Recent home buyers may have to wait two decades before the principal portion of their payment exceeds interest.
- This slower pace of repayment means higher overall interest costs over the life of the loan.
- Expect to hold onto your property longer if you’re buying in today’s market with higher interest rates and prices.
4. There’s Now a Stronger Argument to Pay Extra Each Month
- With higher interest rates, it’s beneficial to consider paying extra towards your mortgage each month.
- By accelerating your repayment, you can reduce interest expenses and potentially pay off your loan quicker.
- Extra payments can help rebalance the principal and interest distribution, acting as if you had a lower rate mortgage.
In conclusion, the mortgage landscape has shifted, and with higher rates, it’s essential to strategize your repayment plan. Consider making additional payments to counter the increased interest costs and potentially reduce the overall loan term. Don’t take buying a home lightly in today’s market – it requires careful financial planning and a long-term commitment.
