‘Mortgage Math Is Brutal’ — The Shocking Amount You’re Actually Paying for Your House

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Becoming a homeowner may be the ultimate dream of many Americans, but the process can be stressful. Not knowing the ins-and-outs of complicated mortgage agreements and terms is a common anxiety trigger, but knowing what you’re actually paying for your house could also be frightening.

According to a recent tweet by Austen Allred, co-founder and CEO of Bloom Institute of Technology, “new mortgage math is brutal” due to current excessive rates. Using an example that has received 7.7 million views since it was posted on June 12, Allred explained that because of sky-high interest rates, a significant portion of your payments would go toward interest — leaving a substantial amount still owed on the principal.

“Say you buy a $1m house with $200k down at a 7% rate ($800k mortgage). Over the first three years you pay $193k ($5,322/mo.) After those $193k of payments your $800k mortgage is now at $774.5k. You paid $166k in interest, $25.5k in principle,” Allred revealed.

If these numbers seem alarming to you, you’re not alone. Although there are signs that mortgage rates are slowly marching downward and will hopefully continue a gradual decline as long as inflation stays in check — and the economy doesn’t start heating up — rates are still a major concern. According to the Freddie Mac Primary Mortgage Market Survey (PMMS), the 30-year fixed mortgage rate rests at 6.9% as of Aug. 3, 2023.

If the prospect of buying a house seems daunting, you owe it to yourself to eliminate the financial stresses that it can bring by securing the lowest possible mortgage rate and paying it off as fast as you can.

Securing a Lower Mortgage Rate

• Demonstrate Stable Income: Lenders prefer borrowers with stable employment and income history, so having a steady job and income can improve your chances of getting a lower rate.
• Improve Your Credit Score: Lenders frequently offer better rates to borrowers with higher credit scores. Paying bills on time, reducing debt and managing your credit responsibly can help improve your credit score.
• Shop Around: Shopping around to compare rates from multiple lenders is a no-brainer. Even a small difference in interest rates can result in significant savings over the life of the loan. Don’t settle for the first mortgage offer you receive. “The most important thing a borrower can do to obtain a lower mortgage rate is to do their homework — and shop around,” said Al Murad, executive vice president at AmeriSave Mortgage, per Money.com. “Rates can vary by several percentage points from lender to lender.”
• Consider Purchasing Mortgage Points: Mortgage points are upfront fees you pay to lower your interest rate. One point is equal to 1% of the loan amount. While paying points requires an initial fee, it can lead to lower monthly payments over time.
• Bump Up Your Down Payment: A larger down payment can often lead to a lower interest rate and it also reduces the overall loan amount, which can positively impact your rate.

Paying Off Your Mortgage Faster

• Refinance to a Shorter Term: Refinancing your mortgage to a shorter term, such as a 15-year mortgage, can result in higher monthly payments but a lower overall interest cost.
• Make Extra Payments: One of the most straightforward ways to pay off your mortgage faster is to make extra payments towards the principal. Even small additional payments can add up over time and reduce the overall interest you pay. Setting up automatic payments to your mortgage lender for extra principal payments can help ensure you stick to your payoff strategy.
• Biweekly Payments: Instead of making monthly payments, consider making half of your monthly payment every two weeks. This results in 26 half-payments, or 13 full payments per year instead of the usual 12. However, as CNN Underscored stated, “Just make sure you do not pay a fee to your mortgage company in order to make biweekly payments. If your mortgage servicer doesn’t offer this option, you can roughly accomplish the same goal by mailing in one extra mortgage payment each year, or by taking the principal and interest of your mortgage payment, dividing it by 12, and adding that amount to your monthly payment.”
• Use Unexpected Bonuses: Whenever you receive unexpected windfalls like tax refunds, bonuses or gifts, consider putting a portion of that money towards your mortgage principal.
• Budget for Extra Payments: Include mortgage prepayments in your monthly budget. Treating them as a regular expense can help ensure consistent extra payments.

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