When one purchases a home more often than not they will be putting some money down and will obtain a loan for the rest. That lender will charge interest on that loan until the loan is fully paid off… this concept is not a surprise to most.
However, most people do not know how much interest they actually pay over the life of their loan.
Lenders do a great job of advertising low-interest rates and showing borrowers their principal loan balance when they login to make payments. But nowhere do lenders disclose how much they themselves will be earning in interest over the life of the loan. They just show you the low-interest rate they are giving you, which seems like too low of a number to cause any harm.
It is important to understand that lenders will be collecting tens to hundreds of thousands in interest over the life of a mortgage loan.
If you would like to know how much you will pay in total on your loan take your monthly mortgage payment and multiply it by the number of months your loan spans. For a 30-year fixed mortgage that is 360 months.
Example: A borrower takes out a 30-year fixed mortgage at a 3.5% interest rate for $500,000. The monthly principal & interest payment on this loan (not including taxes and insurance!) is $2245.22.
Then multiply $2245.22(monthly payment) * 360(months in 30-year fixed loan) and you will see the total you will pay back to the lender over 30 years is $808,280.44.
That is $308,280.44 in interest you will pay to your lender over 30 years! More than half of the total amount of what you originally borrowed!
It is important to understand this concept as it highlights how important the decision to buy a home and take out a mortgage truly is.
Furthermore, the interest you will pay is only one expense that comes with owning a home. Keeping up with maintenance and large capital expenses like HVAC systems or a new roof comes with large price tags as well.
For people considering selling their home. Do it quickly! The longer you wait, the more interest you will pay. Which is money you won’t see again.
