For purposes of explanation we will use a hypothetical loan of $200,000.00 for thirty years.  We will look at the total cost of the loan if you sold your house at the end of ten years.  The reason why I am using the ten year mark is because most people stay in their homes for about ten years. We will also look at the cost of the loan at the end of thirty years. These figures do not include taxes or insurance.

Conventional Loan:

            A mortgage loan of $200,000 at 6% will require a monthly payment of $1,199.10.  At the end of ten years you will have paid $143,982.13 and owe $167,371.45.  Since you reduced the principal by $32,069.01 you should deduct this from the amount paid since you don’t owe as much as you did at the start of the loan.  Therefore the net cost of the loan is $111,823.12.  The true cost of the loan at the end of thirty years would be the total of payments $431,676.00, less principal reduction, $200,000.00, or $231,676.38.  We will refer to this as the PI (principal + interest) loan.

	Monthly Payment	Total Payments	Beginning Principal	Ending Principal	True Cost of Loan
10 Years	$1,199.10	$143,982.13	$200,000.00	$167,371.45	$111,823.12
30 Years	$1,199.10	$431,676.38	$167,371.45	$0	$231,676.38

Interest Only Loan:

            How much would a loan cost when you pay interest only for a period of time, in this case, the first ten years, and then adjust the payment so that it is paid off at the end of 30 years.  In this case, the interest only payment is $1,000 per month.  At the end of ten years you will have paid $120,000, but not reduced the principal, so the cost of the loan would be $120,000.  This is $8,736.42 more than the PI loan.  At the start of year eleven the payment would jump to $1,432.86.  At the end of the loan you will have paid $463,886.91, less the principal reduction of $200,000.00, which is $32,210.53 more than the PI loan.

	Monthly Payment at Beginning of Loan and Year Eleven	Total Payments	Beginning Principal	Ending Principal	True Cost of Loan	More expensive than PI loan
First 10 years	$1,000.00	$120,000.00	$200,000.00	$200,000.00	$120,000.00	$8,736.42
Years 11 to 30	$1,432.86	$343,866.91	$200,000.00	$0	$143,886.91
Total		$463,886.91	$200,000.00	$0	$263,886.91	$32,210.53

             If you have or had an interest only loan:

ARM:

            An ARM (adjustable rate mortgage) is much more difficult to calculate because the interest rate adjusts according to some type of index.  Since most ARM’s start off with a low teaser rate and then adjust to the real rate, you can approximate the total cost of the loan.  In this case assume that the ARM called for three years of payments at 4%.  Further assume that the balance of the loan was paid off at 7.5%.  The starting payment would be $954.83.  At the beginning of the fourth year the payment would jump to $1,362.17.  At the end of ten years you will have paid $148,796.06.  The balance on the note would be $169,088.89.  Therefore you would have reduced your principal by $30,911.11, making the true cost of the note $117,882.44.  This is $6,621.37 more expensive than the PI loan.  At the end of 30 years the loan would cost $275,716.52 or $44,040.14 more than the PI loan.   

	Monthly Payment at Beginning of Loan and Year Three	Total Payments	Beginning Principal	Ending Principal	True Cost of Loan	More expensive than PI loan.
First 3 years	$954.83	$34,373.90	$200,000.00	$188,997.45	$23,371.35	$
Years 4 to 10	$1,362.17	$117,884.95	$188,997.45	$169,088.89	$94,513.60	$
Total 10 years	$1,403.01	$148,796.06	$200,000.00	$169,088.89	$117,884.95	$6,621.37
Years 4 to 30	$1,403.01	$441,342.62	$188,997.45	$0	$252,345.17
Total		$475,716.52	$200,000.00	$0	$275,716.52	$44,040.14

If you have or had an ARM:

Fixed Payment for a Specified Period:

            The final example is a loan where the lender fixes a low monthly payment for a certain number of months and then adjusts the payments similar to an ARM.  For this example assume that the loan was at 6% for the entire portion of the loan.  However, the borrower only had to pay $700.00 per month for the first ten years.  At the end of ten years the principal would have gone up to $249,163.80 and the payments were adjusted to $1,785.09, in order to include principal so that the loan was paid off at the end of thirty years.  At the end of ten years you would have paid $21,900.22 more than a PI loan.  At the end of thirty years you will have paid $512,420.85, with a true cost of $312,420.85 or $80,744.47 more than a PI loan.

 

	Monthly Payment	Total Payments	Beginning Principal	Ending Principal	True Cost of Loan	More expensive than PI loan.
10 Years	$700.00	$84,000.00	$200,000.00	$249,163.80	$133,163.80	$21,900.22
30 Years	$1,785.09	$428,420.85	$249,163.80	$0	$179,257.05
		$512,420.85	$200,000.00	$0	$312.420.85	$80,744.47

           
If you have or had a fixed payment for a specified period:

Conclusion:

            A homeowner must use every tool in his or her arsenal when dealing with a lender.  If you don’t, it is like running a race in high heels.  You may get around the track if you try hard enough, buy you will not win the race.   

            We do not offer loan modification by itself.  We provide a legal opinion regarding your individual case, inform you of your rights, and as appropriate, use any violation of your rights as a defense to foreclosure and reason for modification.  If necessary, we will appear in court and defend you against the foreclosure. 

            If you feel that you do not want to know your legal rights and whether they have been violated then we suggest that you apply on your own or seek counseling from a HUD approved source.  However, only an attorney can advise you of your rights specific to your case.