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Posted January 13, 2013
in Mortgage Strategy

Mortgage Interest Costs Fall 31% With Rates Still Under 3.5 Percent

Mortgage interest tax deductions are worth less to homeowners as mortgage rates drop

Mortgage interest tax deductions are worth less to homeowners as mortgage rates drop

It's a Refi Boom. Mortgage rates have been on decline for more than 2 years. Conforming mortgage rates, FHA mortgage rates, VA mortgage rates and jumbos -- they're all at all-time lows.

Meanwhile, so is the value of the mortgage interest tax deduction. As mortgage rates remain below 4 percent, today's homeowner is paying less mortgage interest to the bank each year.

As compared to two years ago, homeowners paying 32% less mortgage interest.

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Homeowners Pay More Principal, Less Mortgage Interest

Mortgage payments are comprised of two parts -- principal, and interest. Principal is a repayment to the bank of the original amount borrowed; interest is the fee paid to borrow the money at all.

The principal-to-interest ratio of a mortgage payment changes monthly, with the principal portion increasing monthly, and the interest portion decreasing monthly. The schedule of payment is known as amortization (ah-mor-tih-ZHAY-shun) and it's a bank-friendly process. The early years of a loan, after all, are interest-heavy.

That is, until mortgage rates get low.

With current 30-year fixed rate mortgage rates at 3.40 percent, on average, amortization schedules aren't so bad. The first payment of a new 30-year fixed rate mortgage is 36 percent principal.

Now, compare this year's mortgage amortization schedule to a schedule at last year's rates :

  • January 2013 : First mortgage payment is comprised of 36% principal, 64% interest
  • January 2011 : First mortgage payment is comprised of 24% principal, 76% interest

For homeowners with mortgages from January 2011, it will take until 2024 to build up to 36% mortgage principal per payment.  Today's home buyers and refinancing households get that amount on their first day with the loan.

Today's new mortgagors pay less interest and they pay down the mortgage more quickly.

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Low Mortgage Rates Yield 31% Mortgage Interest Savings

Falling mortgage rates make for a cumulative effect on household savings. Month-after-month, that low payment lasts until 30 years have passed. The effects can be huge.

Assuming two $300,000 mortgages -- one started this year and one started last year -- the difference in mortgage interest paid over 30 years is $107,000. That's more than one-third of the original amount borrowed.

  • January 2013 : A $300,000 mortgage requires $181,000 in mortgage interest in 30 years
  • January 2011 : A $300,000 mortgage requires $267,000 in mortgage interest in 30 years

At today's mortgage rates as compared to last year's, a homeowner will pay 31% less mortgage interest over the life of a 30-year loan.

The math works at all price points, too. Whether you you're borrowing at the $417,000 conforming loan limit of Lower Merion, Pennsylvania; or Miami, Florida, for example; or, at the $625,500 jumbo loan limit of Bethesda, Maryland; or San Jose, California, your mortgage interest costs will be 31 percent lower at today's mortgage rates as compared to the rates of two years ago.

In this way, falling mortgage rates also helps homeowners who cannot -- or do not -- claim mortgage interest deductions (MID) on federal tax returns. The value of a mortgage interest tax deduction drops as mortgage rates do.

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Refinancing For All : No Home Equity Required

Million of U.S. homeowners remain eligible to refinance into today's ultra-low rates.

With even modest credit scores and a verifiable income, homeowners can be mortgage-eligible via any one of five government agencies -- Fannie Mae, Freddie Mac, the FHA, the VA and the USDA. Each has a refinance program for homeowners with, or without, home equity.

For homeowners whose homes have lost value since purchase, there are options :

For everyone else, standard refinance programs exist with the same low mortgage rates.

If you're a U.S. homeowner and have yet to join the Refi Boom, see what today's low mortgage rates can do for you. Experience monthly savings and long-term savings, too.

Click here to get today's mortgage rates.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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2015 Conforming, FHA, & VA Loan Limits

Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)