October 24th, 2012 10:55 AM
Mortgage rates are at all-time lows. In fact, they have been on the decline for the last 20 months.
As mortgage rates drop, so does a homeowner's total mortgage interest over the term of the loan. Compared to two years ago, homeowners are paying 38% less mortgage interest over the life of their loans.
The early years of a loan are typically interest-heavy. With today's 30-year fixed rate mortgage rates, the first payment of a new 30-year fixed rate mortgage is 37% principal. Let's compare this with rates from 2 years ago:
If you had financed your home 2 years ago, it would take you more than 10 years to reach the same 37/63 ratio that's available to today's home buyers and refinancing households on their first day with the loan. Not only do today's new homeowners pay less interest, but they establish equity sooner by paying down their mortgage principal more quickly.
Falling mortgage rates make for a cumulative effect on household savings. That low payment lasts for 30 years, and the effects can be huge. Assuming two $300,000 mortgages, one started this year and one started 2 years ago, the difference in mortgage interest paid over 30 years is $107,000. That's more than one-third of the original amount borrowed.
Compared to mortgage rates of 2 years ago, a homeowner will pay 38% less mortgage interest over the life of a 30-year loan.
Source: Freddie Mac, 30 year fixed rate, loan amount $300,000.