Math and/or investment folk, please come hither...

I’m having a brain fart and can’t figure something out. Here’s the situation:

The difference in monthly payments between a $400,000 30-yr fixed mortgage at 6.5% ($2528.27/mo) and the same mortgage at $350,000 ($2212.24/mo) is $316.03. In fact, any $50k difference, assuming all other loan parameters are the same as above, will always result in a difference in the monthly payment of $316.03. Now- if we take that $50,000 and invest it at 6.5%, we only get a monthly interest rate of $270.83.

Why is the $50k mortgage difference at 6.5% not the same as the $50k investment at 6.5%?

Because you are paying off the mortgage. The amount of principle that you pay per month goes down if the total principle goes down.

But the amount I pay each month doesn’t change throughout the entire 30-year life of the mortgage.

http://www.bankrate.com/brm/mortgage-calculator.asp?unroundedPayment=1097.749117045651&loanAmount=400000&nrOfYears=30&nrOfMonths=360&interestRate=6.5&startMonth=7&startDay=1&startYear=2007&monthlyPayment=+++++%3D%3D%3D>&showAmort=Show%2FRecalculate+Amortization+Table&monthlyAdditional=0&yearlyAdditional=0&yearlyAdditionalMonth=7&oneAdditional=0&oneAdditionalMonth=7&oneAdditionalYear=2007&paidOffDate=Aug+1%2C+2037

That’s a link to your 400k loan amortized out so you can see how the payments are applied. You’ll see that when the loan is 400k, the actual interest portion of the $2528 is $2166 which is 6.5% interst (over a year of course, per month it’s .542%). However that would be an interst only loan and the principal would never be reduced.

What you need to understand is that with a normal non interst only payment, the rate you are given is how much interest is added on to the principle each month, not how much you are paying.

Let’s see. $400,000: 6.5%: 30 years…

510,000 in interest paid for a total of $910,000 for a $400,000 purchace… :eek:

If it were the same amount you would still owe the whole $400K at the end of 30 years.

Over 30 years, I don’t think that is really that bad, considering the appreciation of home value (I’ve heard 6% per year is average) and inflation.

:smack: :smack:

Thanks for clearing the boogers out of my head.