For a change of pace, I thought today might be a good day to talk about “The Cost of Money.”
Let’s face it Banks are a business just like all the other business in that they are in the business of selling their product which just happens to be money. So, banks sell money. Well, they don’t exactly sell money but they do lend us money and that is the product they are selling.
When we go to Hannaford or Shaw’s to buy a gallon of milk we know that the store has built into the price for the milk their profit. Banks when they sell their product also have their profit built in and it is called Interest.
Today, August 22 the current bank interest rates are:
- 30 year Fixed Rate mortgage is 3.71%
- 15 year Fixed Rate mortgage is 3.04%
- 5 year ARM mortgage is 3.70%
These rates are of course only averages because each bank set’s its own rate.
There are several things with mortgages that are very important to know:
- Points – a point is 1% of the total mortgage and it represents bank profit. The more points you are willing to pay upfront the lower the interest rate
- ARM – this is an Adjustable Rate Mortgage. These are very attractive if resale in several years is probably going to happen.
- Your cost of money – if the total amount of interest is more than the amount of the mortgage you will end up paying the bank more than your house costs. The Cost of Money is critical
A 30 year fixed rate mortgage with a monthly payment of $921 will cost you $131,811.00 in interest. The cost of money in this case is about one half the cost of the house.
A 15 year fixed rate mortgage with a monthly payment of $1,385 will cost you $49,302.00 in interest or roughly one quarter the cost of your house.
These numbers are to be used only as a guide, please check carefully with your bank but you can clearly see from our examples that the Cost of Your Money is a HUGE factor o consider. Spending an extra $461 each month will cut your costs in half and save you fifteen years.
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