Whether you’ve read The Hitchhiker’s Guide to the Galaxy or not, there’s a good chance you’ve heard it’s answer to life, the universe, and everything. According to the book, it’s 42. As someone who loves numbers, both in my career as a mortgage agent and in my favorite pastime of baseball, I’m here to tell you that may not be the case when it comes to your mortgage.
I’m the first to recognize that a blog with a lot of numbers and calculations will make most people’s eyes roll back in their heads as they fight the urge to return to their smart phone distraction. It’s with that knowledge in mind that I vow to keep this blog calculation free! Mostly because, like a good mortgage agent, I did the math ahead of time. Well, that and the fact I was never a fan of showing my work in school. However, as always, if at the end of the blog you have any questions- I’m only an email away.
It is with no small amount of humility and sarcasm that I say; this blog may contain the single most important piece of information you need to know when getting or renewing a mortgage. And that piece of information is… 2.80.
Your mortgage payment is made up primarily of two parts: the principle and the interest. A portion of every mortgage payment goes toward paying both. Many people believe, when approaching a mortgage, the goal is to get the lowest rate possible. The reality is, that’s a half truth. The goal when approaching a mortgage should always be: pay more off the principle than you pay in interest, for as much of the term as you can. This is where 2.80 becomes so important.
A mortgage with an interest rate of 2.80% or less means; your payment will always contribute as much (or more) off the principle as it does the interest- for the entire length of the mortgage.
This is key in our current market. We all know interest rates are the lowest they have ever been. It also stands to reason that they will go up. The dilemma is, nobody can possible tell you when or by how much. The temptation may be to take a shorter term mortgage of two or three years at a lower rate is strong. After all, even if rates go up, they are likely to be higher in five years than in three, right? Wrong! Rates fluctuate. Just because they go up, doesn’t mean they stay up.
In May 2009, prime rate was 2.25%. Anyone who got a three year mortgage, using the above logic, would have renewed in 2012-when prime rate was 3.0%. Conversely, if they had gotten a five year mortgage, they would have renewed in 2014, when prime rate was… 3.0%. The difference? They had two more years of the lower rate, renewed at the exact same rate, and were now paying 3% interest on a lower principle.
This again emphasizes why 2.80% is a key number. The goal shouldn’t be to get the lowest rate possible. It should be to get the longest term possible where the rate is guaranteed to be below 2.80%.
As always, please “like and share”. You never know who it might help. If you have any questions, feel free to email me at firstname.lastname@example.org