We’ve all heard about the PITI formula: principal, interest, taxes and insurance. These four items make up the monthly payment that most homeowners send in to their lender each month.
Principal repayment is the gradual reduction in the loan balance over the term of the loan. And interest can be thought of as the rent you pay for borrowing the money you used to buy your house.
Because home loans are calculated with simple interest, the amount of interest charged declines each month as the principal balance of the loan is paid down.
Taxes are paid to the county or municipality collecting them, and lenders require that we maintain insurance coverage on the house to protect them (and us) against loss due to fire or other casualty.
Of these four elements, the interest we spend over the life of the loan is typically the greatest expenditure, so when a borrower has an opportunity to significantly reduce that expense, it’s worth considering.
That opportunity may be at hand.
Recent comments by Federal Reserve Chairman Ben Bernanke indicated that the central bank believes inflation will not be a concern for some time.
That was good news for mortgage markets, causing rates to drop slightly.
But here’s the best news: For the first time in a long time, the differential between 30- and 15-year terms has become significant, rewarding the shorter-term borrower with a rate of only 4.75 percent. In contrast, the typical borrower who chooses a similar loan with a 30-year term will pay a rate of 5.375 percent.
Both of these rates are for conforming fixed-rate loans of $417,000 or less, and both these rates are excellent when compared with predominant rates over the past 30 some years. But any time you have the opportunity to lock down a home loan rate of 15 years at any rate under 5 percent, it’s a true bargain.
My rule of thumb is to always seek to lock in a low rate for as long as possible — Clark Howard once choked when I told him I would take a 100-year fixed-rate loan if I could find one — but when rates for 15-year loans get below 5 percent, well, that’s tempting for everyone.
John Adams is a broker and investor. He answers real estate questions on radio station WGKA-AM (920) at noon every Saturday. For more real estate information or to make a comment, visit www.money99.com.
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