Real Estate Math Problems – Mortgage rates have dropped as a result of the debt ceiling deal. According to a recent article in the Christian Science Monitor, mortgage rates have dropped to 4.39% from 4.55% the previous week for a 30-year loan.

What does a drop in interest rates mean for a homeowner? Although it may seem like there is a small different in the interest rate, this could add up over the life of the loan. Here’s a real estate math example of how this works:

Example

Let’s say your client wants to buy a \$300,000 home and will be taking out a loan for \$240,000 (which is 80% of the price). How much more interest will they pay if they got a 4.55% interest rate over a 4.39% interest rate?

Solution

At 4.39% annual interest, there are a variety of calculators that can tell you the estimated mortgage payment. For a \$240,000 loan at 4.39% interest for 30 years, the monthly mortgage payment is \$1,200.41 per month. Over 30 years x 12 months/year = 360 months, this means the buyer will pay 1200.41 x 360 = \$432,146. Subtracting out the principle amount, this means that the buyer pays \$192,146 in interest over the life of the loan.

At 4.55% annual interest, the monthly mortgage payment is \$1,223.19 per month. Over 30 years, this means the buyer will pay 1,223.19 x 360 = \$440,348. Subtracting out the principle amount, this means that the buyer pays \$200,348 in interest over the life of the loan.

Therefore, the overall different between a 4.55% and 4.39% loan is \$8,202! While each monthly payment is only a few more dollars a month, you can see this quickly adds up over the life of the loan!