Loan Amortization Table
Is a Loan Amortization Table Really Useful?
If you're using a loan amortization table to get full disclosure, probably you're not getting the whole answer you're looking for. When someone closes on a loan there are other factors such as closing costs that could negate the effects of a lower interest rate on a mortgage you may be closing on. For instance, some mortgages have high points, such as three or four points.
What is a point?
A point is a service charge lenders charger you for the sheer pleasure of letting you do business with them. A point is 1%. On a $200,000 mortgage, four points would cost you $8,000 at closing. This is before any legal fees or application fees are charged. So, in this case, it could be that a higher interest rate mortgage with no points would be more cost-effective.
Comparing two different mortgages
Let's take this example. You're buying a house and have a strong feeling that you will be moving within five years. You're offered one mortgage, which is a 7.5% mortgage. It is for 30 years, $200,000 and it is zero a point mortgage. Someone else offer you a mortgage that has a 7% interest rate. It is also a $200,000 mortgage for 30 years, but it costs 4 points at closing.
With the 7.5% mortgage after five years you will have paid $73,140.67 in interest charges. On the 7% mortgage you would have paid 68,099.18 over the five-year period in interest. However with the 7% mortgage you would have paid 4 points at closing or $8000. Usually this $8000 is added time to the mortgages principal. In this case, the higher interest rate mortgage would be the better deal for you.
On the other hand, what about if you held the mortgage all the way until the end of its term and then made the final payment? With the 7.5% mortgage you would have paid $303,43.82! Wow! However, with the 7% mortgage you would have paid a mere $279,016.02 in interest charges. Clearly the play here would have been to take the lower rate mortgage and pay the extra points.
So you see, the how long you hold the mortgage is an important matter when choosing which is a better mortgage for your needs. As usual, how well you can predict the future determines how well you do in your finances.
A loan amortization table is helpful
The amortization table was helpful because it showed you how much interest you would be paying with each mortgage over five years and at the end of the mortgage's term. However, to get the whole picture you would have to know what the closing costs were.
You can see that a loan amortization table can be helpful, but when making up your mind which mortgage is better, you have to have more information than a loan amortization table will give you.
Remember, before closing on a mortgage, always be sure how many points, if any, you will be paying. Also, find out if you can mortgage the points, or if you have to pay them out your pocket at closing. Then, take a good guess as to how long you will own your new home. It is only after you have all the information you can make an educated decision on what is the best mortgage for you.