Feb 2, 2009

What does .5% in Interest Really Cost?

This note just in from our friends at CNN and Neighborly Financial:

Senate Republicans are likely to introduce a provision that would encourage lenders to offer a 30-year fixed rate mortgage at 4% for a limited period of time. The loans would only be available to credit-worthy home buyers and homeowners seeking to refinance.

The government would guarantee the loan for a number of years, an aide to McConnell told CNNMoney.com.

Senate Republican Conference Chairman Lamar Alexander, R-Tenn., said on the Senate floor Friday that the measure could involve not only a government guarantee but a subsidy as well.

"If today's prevailing rate were 5.2 or 5.3 percent ... the government would make up the difference."


What does is really mean?

For a $100,000 loan, over 30 years, your monthly bill will be:

* A 4.5% interest rate will cost $506.69 in principle and interest
* A 4.0% interest rate will cost $477.42 in principle and interest
* A 5.0% interest rate will cost $535.82 in principle and interest.


A few:

a) Rates go down AND up. If you are holding off on a purchase or re-fi, hoping for a rate that is just half a percent lower (to 4%), is saving an extra $29 per month worth the risk of missing these lower rates completely?

b) "Money" (loans) are at the cheapest they've ever been. This is an exciting time to buy or re-fi your existing home no matter if the rate is 4% or 5%. That's still the "cheapest money" in 40 years.

c) There are so many unknowns with the bailout and stimulus packages that we don't know where this is all going to end up. Be careful not to bet on a product (loan) that isn't there. In the corporate world, we called such a product "vaporware" (instead of "software").


- Jim


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