A $500,000 mortgage at the current average rate of about 6.25%, per Freddie Mac, costs $3,079 per month for principal and interest. Buyers are often shocked to find out how much interest they’ll pay over the life of the loan, and how slowly they build equity because of it.
Also surprising are the additional expenses rolled into their payments that can increase the payments by hundreds of dollars or more per month.
How Much a $500,000 Mortgage Loan Really Costs
A $500,000 mortgage with a 6.25% interest rate will cost you a total of $1,108,289 in principal and interest, according to an Office of Financial Readiness calculator, possibly doubling the price you pay for your home. The interest portion of that amount is $608,289.
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Why It Takes So Long To Build Equity
When you take out a fixed-rate mortgage loan, the combined principal and interest payment stays the same for the entire loan term. However, a process called amortization allocates the payments a little differently each month.
The first $3,079 payment would repay just $475 of principal. The other $2,604 would pay the interest due on the entire principal. The balance shifts slightly with each subsequent mortgage payment, so just $16 of the final payment would go toward interest.
The amortization schedule grows equity so slowly that it could take years before you break even on your closing costs. Closing costs usually total 2% to 5% of your purchase price, per Zillow.
Extra Costs Your Mortgage Payment Might Include
Many mortgage loans require borrowers to pay into property tax and homeowners insurance escrows each time they make a mortgage payment. This type of loan is called a PITI mortgage, for principal, interest, tax and insurance, as the Consumer Financial Protection Bureau (CFPB) explains.
The escrowed portion equals one-12th of your annual property tax and homeowners insurance premium. If your tax and insurance total $6,000 per year, you’ll pay $500 per month into escrow, increasing your mortgage payment to $5,579.
You’ll also have to pay for mortgage insurance if your down payment is less than 20% of the purchase price. The premium for a $500,000 mortgage could run anywhere from $150 to $350 per month, according to Freddie Mac, increasing the monthly mortgage payment to at least $3,729.
Adding $750 to your monthly obligation is risky. A financial setback that leaves you unable to pay the full $3,729 can lead to foreclosure, even if you pay enough to cover the principal and interest, according to the CFPB.
How To Avoid Mortgage Sticker Shock
Thorough reviews of your loan estimate and closing disclosure are your best defense against mortgage surprises. The estimate gives you a good idea of the total amount you’ll pay each month and is useful for comparing loans from different lenders. The closing disclosure provides the final figures, and you’ll have three days to look it over before closing on your mortgage, per the CFPB.
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This article originally appeared on GOBankingRates.com: What a $500,000 Mortgage Really Costs With Today’s Rates (and Why It Shocks Buyers)
