When you're buying a house, no one expects you to cough up the whole purchase price yourself. Most people just don't have that kind of cash available -- even after checking the cup holder in the car. You'll most likely be borrowing a big chunk of what you need, and that means paying interest. When you take that interest into account, what you end up paying for your house can dwarf the original purchase price.
What you ultimately end up paying for your house depends on three factors. Most important, of course, is how much you actually borrow. If you're a typical buyer, you'll put some of your own money into the deal as a down payment and borrow the rest. The next key element is the interest rate on your mortgage. The higher the rate, the more you'll pay. Third is the length of the loan term. Most mortgages run for 30 years, although 15-year terms are common, too. At this point, be aware that there's math ahead, but it's all for a good cause.
Say you buy a home for $250,000. You make a down payment of 20 percent of the price -- $50,000 -- and you finance the remaining $200,000 over 30 years. If the interest rate on your mortgage is 4 percent, you'll pay a total of $143,739 in interest over those 30 years. By the time the loan is paid off, then, that $250,000 home will have cost you $393,739. And 4 percent is a great rate. Historically, the average interest rate on a 30-year mortgage has been higher than 8 percent. At 8 percent interest, that same loan would cost you $328,310 in interest -- meaning that the total cost of your $250,000 home would be $578,310. Hey, you're living in a half-million-dollar house! (Not really.)
There's a pretty basic formula to calculate how much you'll end up paying for your house once it's paid off. That formula is as follows:
T = DP + (AF x M).
"T" is the total amount you'll pay. "DP" is your down payment. "AF" is the amount financed -- how much you borrowed, in other words. "M" is a multiplier that depends on your interest rate and your loan term. For a 30-year, 4 percent loan, for example, M is 1.718695. Using the example from above:
T = $50,000 + ($200,000 x 1.718695)
T = $50,000 + $343,739
T = $393,739
For 30-year mortgages, here are multipliers (the "M" value in the formula) for interest rates in half-percent intervals from 4 percent to 10 percent: 4 percent, 1.718695; 4.5 percent, 1.824067; 5 percent, 1.932558; 5.5 percent, 2.040404; 6 percent, 2.158382; 6.5 percent, 2.275445; 7 percent, 2.395089; 7.5 percent, 2.517172; 8 percent, 2.641553; 8.5 percent, 2.768089; 9 percent, 2.896641; 9.5 percent, 3.027075; and 10 percent, 3.159258.
For 15-year mortgages: 4 percent, 1.331438; 4.5 percent, 1.376988; 5 percent, 1.423429; 5.5 percent, 1.470750; 6 percent, 1.518942; 6.5 percent, 1.567993; 7 percent, 1.617891; 7.5 percent, 1.668622; 8 percent, 1.720174; 8.5 percent, 1.772531; 9 percent, 1.825680; 9.5 percent, 1.879604; and 10 percent, 1.934289.
It should be noted that the formula above applies only to conventional fixed-rate loans. If you have an adjustable-rate mortgage -- one whose rate goes up or down along with rates in the larger economy -- it's impossible to tell how much you'll ultimately pay because you don't know what interest rates will do over the next 15 or 30 years. Also, if you refinance your loan at some point or start making additional payments to pay down the loan more quickly, that, too, will affect how much you will pay over the loan term.
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