tag:blogger.com,1999:blog-5465015914589377788.post7097978995486835763..comments2019-08-19T18:16:13.644-04:00Comments on Michael James on Money: MERs seem low - why worry?Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-5465015914589377788.post-30764584626930900392009-04-27T00:29:00.000-04:002009-04-27T00:29:00.000-04:00Okay, I used RBC's mortgage calculator, and found ...Okay, I used RBC's mortgage calculator, and found that a $100,000 loan at 7% interest over 25 years with monthly payments will incur $110,122.61 in interest, while a 5% loan will cost $74,480.04 in interest.<br /><br />The difference is 47% more interest (35,642.57). Very close to Patrick's original estimate of 50%. I thought it would be lower, on account of the shrinking principal.genehttps://www.blogger.com/profile/05608927986297939720noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-28258675325058067432009-04-26T20:19:00.000-04:002009-04-26T20:19:00.000-04:00Patrick, MJ,
In Patrick's friend's case (I'll cal...Patrick, MJ,<br /><br />In Patrick's friend's case (I'll call him SpongeBob), it seems the important difference is that 7% interest is 40% higher than 5%. SpongeBob's error was thinking 2% is a small number, and not relating it to the also small number of 5%.<br /><br />Plenty of online mortgage calculators would give the difference in interest charged over a 25 year amortization, and it would be substantial.genehttps://www.blogger.com/profile/05608927986297939720noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-82146641152573030872009-04-26T15:28:00.000-04:002009-04-26T15:28:00.000-04:00Patrick: I hadn't thought about this in the conte...Patrick: I hadn't thought about this in the context of a mortgage, but you're right that the same idea applies. Your friend's phrasing of "2% over 25 years" is interesting because it implies that the cost is 2% divided by 25, when in fact the cost is roughly 2% times 25.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-83801726774262914772009-04-26T15:14:00.000-04:002009-04-26T15:14:00.000-04:00This reminds me of talking to a friend about a cas...This reminds me of talking to a friend about a cash-back mortgage, and he said "oh well, what's 2% over 25 years?" I didn't have a snappy answer for him at the time, but now I'd start with "25 years × 2% is 50%. That means you'll pay roughly half the price of your house for that cash back!".<br /><br />Ok, so that's not exactly right, but it makes the point. In reality, increasing a mortgage from 5% to 7% (which is what he was offered) would cost him about 37% of his house price.Patrickhttps://www.blogger.com/profile/16816252455472704262noreply@blogger.com