Ethical Homes

In a previous article, I gave some rough rules of thumb for estimating monthly mortgage payments; based on feedback from buyers over the last few years, I’ve come up with some simpler ways of getting those estimates, including one trick that makes it easy to see how much your payment will change if your interest rate changes.

Here are the two tricks for estimating payments that most of my buyers seem to prefer to use:

1. To estimate how much each 1/8-percentage-point (0.125%) change in your interest rate will affect your monthly payment: take your loan amount, divide it by $100,000 (or just move the decimal 5 spots to the left), and multiply it by $8. So if you are looking at a $250,000 loan, divide by $100,000 to get 2.5, and multiply by 8; $2.5 x $8 = $20, so each change in your rate of 0.125% means that your monthly payment will change by about $20/mo. This trick is most accurate when dealing with rates close to 6%; if you are looking at rates below 4% or above 8%, the estimates it gives you might be further off than you’d like. (I suggest that all buyers who aren’t going to lock their rate in immediately use this trick at least once to figure out how much their monthly payments will be effected by the the minor day-to-day fluctuations in interest rates that often happen while they are evaluating their options. In most cases, those fluctuations are only in 0.125% increments, and buyers are usually much more comfortable taking their time to evaluate their options knowing that the corresponding fluctuations in their payments will be relatively small.)
2. To estimate your monthly payment:
   • First, figure out how much your monthly payment would be if your rate were 6%, by dropping the thousands part of your loan amount, and multiplying the result by 6. So if you are looking at a $500,000 loan, drop the thousands portion to get $500, and multiply by 6; $500 x 6 = $3000, so that $500k loan would, if the rate were 6%, cost approximately $3000/mo. (The actual payment, if you did the real math, would be $2997.75.)
   • Second, use Trick #1 (above) to figure out how to change that payment for a 6% rate into a payment for your actual rate. If you were looking at that same $500,000 loan, Trick #1 would tell you that each 0.125% change in rate would change your payment by about 5 x $8 = $40/mo.; if your rate was 6.5% rather than 6% (i.e. it was four 0.125% increments higher than 6%), you could add four of those $40/mo bumps to the $3000/mo estimate for the 6% rate, and come up with an estimated monthly payment of $3160. (The actual payment, if you did the real math, would be $3160.34.)

Interested in getting more accurate numbers about monthly payments? Let us know what you are looking for and we’d be glad to run specific numbers for you, and talk to you about the loan options available to you.