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LOW RATES & PRINCIPAL-ED PAYMENTS First-time home buyers and refinancers are clearly benefiting from low interest rates, with less of each mortgage payment going to interest.
Until recently, a new homeowner would have had to pay down their mortgage for many years before they would be in a situation where more than half of their mortgage payments went to principal. For today’s borrowers and refinancers, the future is now. Like, it’s really now. For a mortgage with a 25-year amortization period (the length of time over which the mortgage is paid back to the lender), an interest rate of 2.78% represents an inflection point in borrowing costs, with the first mortgage
payment comprising a 50-50 split between interest and principal. At today’s discounted rate—which recently bottomed out at 1.39% (and acknowledging that, of course, this rate wouldn’t be available to everyone)—only 29% of the first mortgage payment would go towards interest, meaning 71%, or almost three-quarters, of that first payment would go right into equity. This is a boon for today’s borrowers, and it reinforces the financial benefit that can be associated with home ownership.
BORROWERS BENEFITED BY BARE-BONES INTEREST INSTALLMENTS
8.00%
7.00%
6.00%
Dec 2007 = 5.89%
5.00%
4.00%
3.00%
2.78%=50%
Jan 2020 = 2.49%
2.00%
Feb 2021 = 1.39%
1.00%
29%
47%
79%
0.00%
0%
10% 20% 30% 40% 50% 60% 70% 80%
90%
100%
SHARE OF MONTHLY MORTGAGE PAYMENT GOING TO INTEREST
SOURCE: RATE HUB, RENNIE INTELLIGENCE DATA: FIVE-YEAR FIXED DISCOUNTED MORTGAGE RATES
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