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Mortgage loan officers (and also car salesmen) do all in their power to redirect people away from the fact that they're going to fork over e.g. $600k in total i

Mortgage loan officers (and also car salesmen) do all in their power to redirect people away from the fact that they're going to fork over e.g. $600k in total interest and principle for a $300k sticker-price house over 30 years. They do this by focusing on the monthly payment rather than the actual total spend. Convincing buyers that monthly out-of-pocket spend is somehow a proxy for the actual purchase price is a powerful tool that, while not technically deceptive (you do, after all, have to sign a Truth-in-Lending statement when you finance a house), absolutely causes people to spend more than they otherwise would. But since the total lifetime spend on a house is absolutely lower if the interest rate over the life of the loan is lower, then it's true that lower interest rates make homes cheaper over their lifetimes. I don't understand why the writer of this article would chose to focus on the deceptive monthly payment argument rather than the concrete interest-rate argument.

Decabytes 4y ago
I was pleasantly surprised that Rocket Mortgage (Formerly Quicken Loan) actually has a calculator on the dashboard when I view my loan information that shows me how much interest I'll pay over the lifetime of the loan. I can even change my monthly payments and see how it will effect the lifetime interest of my loan and how much faster I will pay it off.
- thathndude 4y ago
  Under federal law, when you get your credit card bill, the bank is required to include a breakdown of, for example, how long you have to pay if you only make the minimum payment, and how much your total payments will be if you only make the minimum payment. We need something similar and conspicuous for mortgages. Let people really see/feel the interest. Another way I’ve seen it phrased is in terms of buying power, and I think that can be effective. I’m ball parking some numbers here, but I think I saw something along the lines of, for the same monthly payment you can buy a $275,000 house with 5% interest or a $350,000 house at 3% interest. I think that drives the point a bit
  - sokoloff 4y ago
    While I would not object to what you propose, I doubt it would change behavior significantly. People who are inclined to think about the interest and overall costs are already easily able to access that information. People who aren't inclined will see 3 additional pages among the 120 pages they see during closing or 30 they see during mortgage application/qualification process. People who can't (or don't want to) math aren't likely to suddenly do so because of an additional disclosure.
  - cpwright 4y ago
    > We need something similar and conspicuous for mortgages. Let people really see/feel the interest. The disclosures you get from the lender are already required to contain a a "FINANCE CHARGE" which is the total interest you will pay on the loan, "The dollar amount the credit will cost you". They also have "TOTAL PAYMENTS", the "The amount you will have paid after you have made all payments as scheduled." The forms are formatted clearly. If you want to know what the number is, it is right there with an explanation.
thathndude 4y ago
I blame consumers for falling into the trap. I’m not saying the sellers don’t have a lot of responsibility here as well, but consumers need to be smarter. It’s a pretty obvious play. I go into a dealership, and the first question the salesman asked me is “what do you want your monthly payment to look like.“ And I always respond with something (a little snarky) like “ I don’t care what my monthly payment looks like, I care about getting a good deal.” While a little snarky, I’m also trying to signal to cut the crap and let’s do business. More consumers need to think that way. In the mortgage context, I think it makes a little more sense to focus on the monthly payment. However, when brokers are using 2 or 5 year ARMs to sell the “monthly payment,” that’s pretty unconscionable.
- SilasX 4y ago
  It would probably be more helpful to state that as "the total sale/out-the-door price" rather than "a good deal". But otherwise, yes, definitely avoid thinking in terms of monthly payments (alone).
willcipriano 4y ago
I don't think that's entirely fair. When I bought my house 6 years ago I looked at the monthly payment and compared it to rent in the area. For my mortgage (and a small down payment) at the time I could rent something like a fairly run down three bedroom apartment or I could own a run down three bedroom house. If you can live somewhere for free you can think about it in those terms (and I think about smaller purchases like cars in those terms) but the monthly payment is a big factor when looking at alternatives. That house has gone up 50% according to Zillow but I wasn't planning on that, I just figured it was worth the down payment and upkeep to have the peace of mind that you wont get evicted because someone else bought the place and maybe get a little something when I move.
- irrational 4y ago
  My monthly mortgage payment on a nearly 4,000 sq foot home on nearly an acre is about the same as local monthly rental of a 2 bedroom apartment. I can't decide if I got a deal or if local rental prices are crazy high.
  - kube-system 4y ago
    The house across the street from me rents for 2x my mortgage.
    - rnk 4y ago
      A lot of people can't afford the down payment to reduce the monthly payments. Plus the endless rumors of hedge funds buying up all the houses w cash to force renting, reduce supply.
- ryandrake 4y ago
  One mistake a lot of people make is comparing their monthly mortgage payment to rent. You're not comparing apples to apples. You should be comparing only the interest portion of the payment to rent. The principal portion is money you're paying back into your own pocket in the form of home equity. Your actual "money that goes away like rent" expense is the interest. When you use this as your comparison, a lot more rent-vs-buy decisions swing over to "buy". Of course you also need to factor in amortized taxes, maintenance, and so on, but mortgage principal is not an expense. EDIT: Plus, if you want to get even more exact, you should be comparing the interest portion minus the tax deduction to rent, because (at least in the US) the government lets you deduct mortgage interest from your income.
HideousKojima 4y ago
The monthly payment is often used because people are comparing the cost to rent, or the monthly cost of their current mortgage.
- cozzyd 4y ago
  Or their monthly salary/expenses...
thatfrenchguy 4y ago
You’re forgetting about inflation here. Sure you’re paying 300k of interest for a 400k house at 5%, but your mortgage payement keeps decreasing in real terms.
- PretzelPirate 4y ago
  Do you benefit from inflation if your income or other investments don’t go up in value? Someone owning a house and making $300k/year loses purchasing power at the same rate as their mortgage “value” drops due to inflation.
  - TimPC 4y ago
    You'd have to be in a pretty crappy situation to not have your income go up over a 25-year mortgage.
    - rnk 4y ago
      Same goes somewhat for home prices going up, but if you don't live in a booming tech city it might not hold true. I'm in one, my house is 4x in under 20 years. My payment was so huge when I got it, now it isn't so crazy.
  - ar_lan 4y ago
    The country would be in shambles if, over a 30 year horizon, your investments did not outpace that interest rate. There's a reason why the <3% interest rate era we just left was considered free money - especially entering into an 8% inflation USA.
twic 4y ago
> But since the total lifetime spend on a house is absolutely lower if the interest rate over the life of the loan is lower, then it's true that lower interest rates make homes cheaper over their lifetimes. House prices are determined to a large extent by interest rates [1]. People have a certain amount they are willing to spend on a mortgage payment each month. If rates are lower, that amount buys a bigger mortgage, so house prices are higher. [1] https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2019/uk-house-prices-and-three-decades-of-decline-in-the-risk-free-real-interest-rate.pdf https://www.bankofengland.co.uk/-/media/boe/files/working-pa...
- khuey 4y ago
  Yes, lower interest rates (and lower property tax rates) often just get capitalized into the price of the asset in supply constrained areas.
joneholland 4y ago
Interest rate below inflation? I don’t care about that 300k, I would have lost it to inflation anyways. Mortgages let you pay 2052 dollars against 2022 prices and that’s under appreciated by the financially illiterate.
- joshstrange 4y ago
  Exactly. My mortgage is at 2.25%, I'd be a fool to pay that off early in the current climate. I am stuck with PMI and I might consider refinancing or something like that in the future but if I can't get the lower rate then it might be worth it to keep paying. One of the hardest things for me w.r.t. finances is removing the emotional aspect. I don't get worked up about a fee added onto my mortgage because when looking at it over a longer period of time it's insignificant compared to what I can do instead with my money. Like right now I could pay off my remaining student loans without issue but why would I while they sit at 0%? If they restart payments I'll wipe it out and there is a part of me that just wants them gone but it would be an emotional decision not a financial one. Paying off my car early was right on the line and I probably made more of an emotional decision when it came to that but no one is perfect.
  - tjr225 4y ago
    You can also eliminate your PMI if you can appraise your home at a price that escapes the difference, so keep an eye on that.
    - joshstrange 4y ago
      I thought at some point I read that FHA loans don't have that? I'll look more into again in a few years when my house will appraise high enough.
    - throwaway6734 4y ago
      Certain loans (like fha loans) have PMI for life
    - germinalphrase 4y ago
snarf21 4y ago
You are forgetting three things that changes a lot for home buyers: * The government lets you deduct your mortgage interest from taxes * The house will appreciate in value over the term of a 30 year loan (almost certainly) * You are paying for your interest and payment in tomorrow's money Also, what am I going to do instead, rent? My rent can go up $50 bucks a year where my mortgage payment is locked in. For most people, home ownership is the safest and best way to build a retirement nest egg and a tangible asset to borrow against in times of trouble.
- BlargMcLarg 4y ago
  I'd change the perspective. Both you and the GP are right, but all these benefits are used against the consumer, to distract them from other things that are happening. It's a subtle race to the bottom which, when looking at younger generations / lower classes and their incapability to buy, suddenly isn't so subtle anymore. The entire thing also creates a cycle of "house prices must go up!" which further exacerbates the problem, at the cost of those who haven't been able to buy houses. Or worse, it creates a large amount of debt which is begging for a 2007-2008 repeat.
  - Qem 4y ago
    Now that people have less children, or no children, and the population tends to age-out and shrink in many countries, I wonder if we'll reach a point where real state prices start to consistently fall every year, reversing the current trend, as people die of old age in large numbers leaving lots of empty properties behind.
    - BlargMcLarg 4y ago
      I hope so, but I also heard enough reasons to not expect this. Many countries are still projecting population increases well until 2030 (sometimes even 2050?). The Netherlands predicts population will continue to rise well until 2070, despite fertility rate fluctuating between 1.5 and 1.7 for five decades now. It's pretty similar to Japan, and Japan has only just started decreasing in population. There's also the cautionary tale of "there is enough housing, just not enough affordable housing", as well as VCs convincing governments to tear down homes in favor of other things, further reducing the number of homes. Then again, there's the darker perspective that lack of medical staff / medicine will significantly lower the lifespan of several generations.
chadash 4y ago
> $600k in total interest and principle for a $300k sticker-price house over 30 years These numbers are a bit high, but definitely in the ballpark [1]. BUT, I think that framing it as total interest + principal is also misleading. Let's say you locked in an interest rate of 2.75% in 2020-21. Your total interest payments on a 300k house (with 20% down) would be $112k, so total P&I would be $412k. Someone might look at this simplistically and think, wow, I'm overpaying by 37% if I take out a mortgage. But at a 2.75% rate, anyone who is financially savvy is going to recognize that as a steal. It's almost like free money, because it's being paid off over 30 years. Your $1500 monthly payment might seem like a lot now, but even with relatively low inflation, your payment in years 15-30 are going to seem like a bargain when they come around. But it's hard for many people to think in those terms. [1] Mortgage rates right now are around 4.75% on a 30 year. Assuming 20% down on a 300k house (60k), you would take out a loan for $240k, and over 30 years you would pay $210k in interest, or a total of 510k in principal + interest. Your monthly P&I would be about $1,530.
FollowingTheDao 4y ago
> I don't understand why the writer of this article would chose to focus on the deceptive monthly payment argument rather than the concrete interest-rate argument. Why? because they have a motive. The motive is to put out a propaganda piece to try to convince the FED not to raise rates. Look at this AI triggering headline at CNBC this morning! They are using the FEDs "favorite" inflation measure, which is 4 points lower then the typical number quoted! https://www.cnbc.com/2022/05/27/the-feds-preferred-gauge-shows-inflation-rose-4point9percent-in-april-in-a-sign-that-price-increases-could-be-slowing.html https://www.cnbc.com/2022/05/27/the-feds-preferred-gauge-sho... Wondering why stocks are up today?
helge9210 4y ago
> $600k in total interest and principle for a $300k sticker-price house over 30 years Present value of $600k paid over 30 years is less than $600k. Depending on the discount rate it might be even less than $300k now.
lr4444lr 4y ago
Inflation is a monthly/annual measure (at least insofar as most economists are interested in it). Looking at monthly spend is the fair comparison. You're bringing up an important point about buyers often left unaware of their total outlay, but on the flip side, their home is usually an appreciable asset, they are free to re-fi, and they also get to deduct mortgage interest.

Decabytes 4y ago

I was pleasantly surprised that Rocket Mortgage (Formerly Quicken Loan) actually has a calculator on the dashboard when I view my loan information that shows me how much interest I'll pay over the lifetime of the loan. I can even change my monthly payments and see how it will effect the lifetime interest of my loan and how much faster I will pay it off.

thathndude 4y ago
Under federal law, when you get your credit card bill, the bank is required to include a breakdown of, for example, how long you have to pay if you only make the minimum payment, and how much your total payments will be if you only make the minimum payment. We need something similar and conspicuous for mortgages. Let people really see/feel the interest. Another way I’ve seen it phrased is in terms of buying power, and I think that can be effective. I’m ball parking some numbers here, but I think I saw something along the lines of, for the same monthly payment you can buy a $275,000 house with 5% interest or a $350,000 house at 3% interest. I think that drives the point a bit
- sokoloff 4y ago
  While I would not object to what you propose, I doubt it would change behavior significantly. People who are inclined to think about the interest and overall costs are already easily able to access that information. People who aren't inclined will see 3 additional pages among the 120 pages they see during closing or 30 they see during mortgage application/qualification process. People who can't (or don't want to) math aren't likely to suddenly do so because of an additional disclosure.
- cpwright 4y ago
  > We need something similar and conspicuous for mortgages. Let people really see/feel the interest. The disclosures you get from the lender are already required to contain a a "FINANCE CHARGE" which is the total interest you will pay on the loan, "The dollar amount the credit will cost you". They also have "TOTAL PAYMENTS", the "The amount you will have paid after you have made all payments as scheduled." The forms are formatted clearly. If you want to know what the number is, it is right there with an explanation.

thathndude 4y ago

I blame consumers for falling into the trap. I’m not saying the sellers don’t have a lot of responsibility here as well, but consumers need to be smarter. It’s a pretty obvious play. I go into a dealership, and the first question the salesman asked me is “what do you want your monthly payment to look like.“ And I always respond with something (a little snarky) like “ I don’t care what my monthly payment looks like, I care about getting a good deal.” While a little snarky, I’m also trying to signal to cut the crap and let’s do business. More consumers need to think that way. In the mortgage context, I think it makes a little more sense to focus on the monthly payment. However, when brokers are using 2 or 5 year ARMs to sell the “monthly payment,” that’s pretty unconscionable.

SilasX 4y ago
It would probably be more helpful to state that as "the total sale/out-the-door price" rather than "a good deal". But otherwise, yes, definitely avoid thinking in terms of monthly payments (alone).

willcipriano 4y ago

I don't think that's entirely fair. When I bought my house 6 years ago I looked at the monthly payment and compared it to rent in the area. For my mortgage (and a small down payment) at the time I could rent something like a fairly run down three bedroom apartment or I could own a run down three bedroom house. If you can live somewhere for free you can think about it in those terms (and I think about smaller purchases like cars in those terms) but the monthly payment is a big factor when looking at alternatives. That house has gone up 50% according to Zillow but I wasn't planning on that, I just figured it was worth the down payment and upkeep to have the peace of mind that you wont get evicted because someone else bought the place and maybe get a little something when I move.

irrational 4y ago
My monthly mortgage payment on a nearly 4,000 sq foot home on nearly an acre is about the same as local monthly rental of a 2 bedroom apartment. I can't decide if I got a deal or if local rental prices are crazy high.
- kube-system 4y ago
  The house across the street from me rents for 2x my mortgage.
  - rnk 4y ago
    A lot of people can't afford the down payment to reduce the monthly payments. Plus the endless rumors of hedge funds buying up all the houses w cash to force renting, reduce supply.
ryandrake 4y ago
One mistake a lot of people make is comparing their monthly mortgage payment to rent. You're not comparing apples to apples. You should be comparing only the interest portion of the payment to rent. The principal portion is money you're paying back into your own pocket in the form of home equity. Your actual "money that goes away like rent" expense is the interest. When you use this as your comparison, a lot more rent-vs-buy decisions swing over to "buy". Of course you also need to factor in amortized taxes, maintenance, and so on, but mortgage principal is not an expense. EDIT: Plus, if you want to get even more exact, you should be comparing the interest portion minus the tax deduction to rent, because (at least in the US) the government lets you deduct mortgage interest from your income.

HideousKojima 4y ago

The monthly payment is often used because people are comparing the cost to rent, or the monthly cost of their current mortgage.

cozzyd 4y ago
Or their monthly salary/expenses...

thatfrenchguy 4y ago

You’re forgetting about inflation here. Sure you’re paying 300k of interest for a 400k house at 5%, but your mortgage payement keeps decreasing in real terms.

PretzelPirate 4y ago
Do you benefit from inflation if your income or other investments don’t go up in value? Someone owning a house and making $300k/year loses purchasing power at the same rate as their mortgage “value” drops due to inflation.
- TimPC 4y ago
  You'd have to be in a pretty crappy situation to not have your income go up over a 25-year mortgage.
  - rnk 4y ago
    Same goes somewhat for home prices going up, but if you don't live in a booming tech city it might not hold true. I'm in one, my house is 4x in under 20 years. My payment was so huge when I got it, now it isn't so crazy.
- ar_lan 4y ago
  The country would be in shambles if, over a 30 year horizon, your investments did not outpace that interest rate. There's a reason why the <3% interest rate era we just left was considered free money - especially entering into an 8% inflation USA.

twic 4y ago

> But since the total lifetime spend on a house is absolutely lower if the interest rate over the life of the loan is lower, then it's true that lower interest rates make homes cheaper over their lifetimes. House prices are determined to a large extent by interest rates [1]. People have a certain amount they are willing to spend on a mortgage payment each month. If rates are lower, that amount buys a bigger mortgage, so house prices are higher. [1] https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2019/uk-house-prices-and-three-decades-of-decline-in-the-risk-free-real-interest-rate.pdf https://www.bankofengland.co.uk/-/media/boe/files/working-pa...

khuey 4y ago
Yes, lower interest rates (and lower property tax rates) often just get capitalized into the price of the asset in supply constrained areas.

joneholland 4y ago

Interest rate below inflation? I don’t care about that 300k, I would have lost it to inflation anyways. Mortgages let you pay 2052 dollars against 2022 prices and that’s under appreciated by the financially illiterate.

joshstrange 4y ago
Exactly. My mortgage is at 2.25%, I'd be a fool to pay that off early in the current climate. I am stuck with PMI and I might consider refinancing or something like that in the future but if I can't get the lower rate then it might be worth it to keep paying. One of the hardest things for me w.r.t. finances is removing the emotional aspect. I don't get worked up about a fee added onto my mortgage because when looking at it over a longer period of time it's insignificant compared to what I can do instead with my money. Like right now I could pay off my remaining student loans without issue but why would I while they sit at 0%? If they restart payments I'll wipe it out and there is a part of me that just wants them gone but it would be an emotional decision not a financial one. Paying off my car early was right on the line and I probably made more of an emotional decision when it came to that but no one is perfect.
- tjr225 4y ago
  You can also eliminate your PMI if you can appraise your home at a price that escapes the difference, so keep an eye on that.
  - joshstrange 4y ago
    I thought at some point I read that FHA loans don't have that? I'll look more into again in a few years when my house will appraise high enough.
  - throwaway6734 4y ago
    Certain loans (like fha loans) have PMI for life
  - germinalphrase 4y ago

snarf21 4y ago

You are forgetting three things that changes a lot for home buyers: * The government lets you deduct your mortgage interest from taxes * The house will appreciate in value over the term of a 30 year loan (almost certainly) * You are paying for your interest and payment in tomorrow's money Also, what am I going to do instead, rent? My rent can go up $50 bucks a year where my mortgage payment is locked in. For most people, home ownership is the safest and best way to build a retirement nest egg and a tangible asset to borrow against in times of trouble.

BlargMcLarg 4y ago
I'd change the perspective. Both you and the GP are right, but all these benefits are used against the consumer, to distract them from other things that are happening. It's a subtle race to the bottom which, when looking at younger generations / lower classes and their incapability to buy, suddenly isn't so subtle anymore. The entire thing also creates a cycle of "house prices must go up!" which further exacerbates the problem, at the cost of those who haven't been able to buy houses. Or worse, it creates a large amount of debt which is begging for a 2007-2008 repeat.
- Qem 4y ago
  Now that people have less children, or no children, and the population tends to age-out and shrink in many countries, I wonder if we'll reach a point where real state prices start to consistently fall every year, reversing the current trend, as people die of old age in large numbers leaving lots of empty properties behind.
  - BlargMcLarg 4y ago
    I hope so, but I also heard enough reasons to not expect this. Many countries are still projecting population increases well until 2030 (sometimes even 2050?). The Netherlands predicts population will continue to rise well until 2070, despite fertility rate fluctuating between 1.5 and 1.7 for five decades now. It's pretty similar to Japan, and Japan has only just started decreasing in population. There's also the cautionary tale of "there is enough housing, just not enough affordable housing", as well as VCs convincing governments to tear down homes in favor of other things, further reducing the number of homes. Then again, there's the darker perspective that lack of medical staff / medicine will significantly lower the lifespan of several generations.

chadash 4y ago

> $600k in total interest and principle for a $300k sticker-price house over 30 years These numbers are a bit high, but definitely in the ballpark [1]. BUT, I think that framing it as total interest + principal is also misleading. Let's say you locked in an interest rate of 2.75% in 2020-21. Your total interest payments on a 300k house (with 20% down) would be $112k, so total P&I would be $412k. Someone might look at this simplistically and think, wow, I'm overpaying by 37% if I take out a mortgage. But at a 2.75% rate, anyone who is financially savvy is going to recognize that as a steal. It's almost like free money, because it's being paid off over 30 years. Your $1500 monthly payment might seem like a lot now, but even with relatively low inflation, your payment in years 15-30 are going to seem like a bargain when they come around. But it's hard for many people to think in those terms. [1] Mortgage rates right now are around 4.75% on a 30 year. Assuming 20% down on a 300k house (60k), you would take out a loan for $240k, and over 30 years you would pay $210k in interest, or a total of 510k in principal + interest. Your monthly P&I would be about $1,530.

FollowingTheDao 4y ago

> I don't understand why the writer of this article would chose to focus on the deceptive monthly payment argument rather than the concrete interest-rate argument. Why? because they have a motive. The motive is to put out a propaganda piece to try to convince the FED not to raise rates. Look at this AI triggering headline at CNBC this morning! They are using the FEDs "favorite" inflation measure, which is 4 points lower then the typical number quoted! https://www.cnbc.com/2022/05/27/the-feds-preferred-gauge-shows-inflation-rose-4point9percent-in-april-in-a-sign-that-price-increases-could-be-slowing.html https://www.cnbc.com/2022/05/27/the-feds-preferred-gauge-sho... Wondering why stocks are up today?

helge9210 4y ago

> $600k in total interest and principle for a $300k sticker-price house over 30 years Present value of $600k paid over 30 years is less than $600k. Depending on the discount rate it might be even less than $300k now.

lr4444lr 4y ago

Inflation is a monthly/annual measure (at least insofar as most economists are interested in it). Looking at monthly spend is the fair comparison. You're bringing up an important point about buyers often left unaware of their total outlay, but on the flip side, their home is usually an appreciable asset, they are free to re-fi, and they also get to deduct mortgage interest.