Economics on the small scale

Tuesday, April 25, 2006

45-year mortgages



Via Daniel Gross, comes this snippet from the WSJ:
Neil Garfinkel, partner and real-estate specialist with law firm Abrams Garfinkel Margolis Bergson in New York and Los Angeles, says borrowers pay much more in interest with longer amortization mortgages than they save.

For a $300,000 loan at 7%, he said, the monthly payment for a 30-year schedule would be $1,995.91, and for a 45-year would be $1,829.10, for a savings of about $166.81 a month or a little over $2,000 a year. But the interest paid over the full term would be $418,526.69 for a 30-year loan and $687,714.82 for the 45-year loan.

"Will it help consumers get into bigger houses? I don't really know," Mr. Garfinkel said.


To answer Mr Garfinkel's question, let's start with this Amortization Calculator and recalculate the $1,995 monthly payment by plugging in the principal and interest rate. Now, let's reduce the principal until we get $1829 as the monthly payment.

The number I got was $275,000. So for the opportunity to buy less than 10% more house, would you pay more than 50% more in interest ?

2 Comments:

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