Suneet Singal on interest rates and the monthly payment

Suneet Singal’s real estate and corporate finance background is a reason to slow down when a single interest rate is asked to stand for an entire housing payment. The note rate, the annual percentage rate, and a national weekly average are three different numbers. Principal and interest are a fourth idea, and the check a household actually writes is often a fifth, once taxes, insurance, and mortgage insurance are included. This entry shows how a fixed note rate becomes a monthly principal-and-interest payment, which public series to open before repeating a national figure, and which columns on that series are not a quote for any named borrower. It does not print today’s rate. Today’s rate is whatever the series, or a Loan Estimate, says on the day it is read. The arithmetic below uses labeled hypothetical rates so the formula can be checked without being mistaken for the market.

Three rates that get treated as one

The note rate is the interest rate used to compute interest on the loan balance. It is the rate in the payment formula. The annual percentage rate is a different disclosure. It starts from the note rate and folds in certain upfront loan costs so that a loan with a low note rate and high fees can be compared with a loan that has a higher note rate and a lender credit. The Loan Estimate prints both, in different places, because they answer different questions. Quoting one and calling it the other will make two honest estimates look inconsistent when they are not.

The national figure people hear on the news is neither of those. For a conventional 30-year fixed-rate mortgage, the widely cited weekly average is FRED series MORTGAGE30US. The page names the series, the source, the frequency, and the units. The frequency is weekly. The units are percent. The value is an average, not an offer to a person with a particular credit score, property, or loan size. It is not a 15-year rate, not an adjustable rate, not a jumbo rate, and not an FHA or VA rate. If the sentence you want to write is about one of those other products, this series is the wrong source, and the FRED page should not be leaned on to supply it.

A fourth number, the rate a friend closed at last year, is a historical fact about one file. It becomes misleading when it is repeated as if the market had not moved and as if the friend’s file were the reader’s file. Write the date next to any rate before you repeat it. A rate without a date is not yet a fact you can compare to FRED or to a Loan Estimate. Suneet Singal’s housing entries follow that rule so a later reader can tell a worksheet from a headline.

The fixed-payment formula

For a fixed-rate, fully amortizing loan, the monthly principal and interest is set so that equal payments retire the loan over a fixed number of months. Divide the annual note rate by twelve to get the monthly rate. Count the months. The payment is the loan amount times the monthly rate times one plus the monthly rate, raised to the number of months, all divided by that same power minus one. Early payments are mostly interest, because the balance is large. Later payments are mostly principal. The payment itself stays flat, on a true fixed-rate loan, even while the mix inside it changes. Taxes and insurance are outside this formula and can change even when the principal and interest do not.

A labeled worksheet makes the formula visible without pretending to quote the market. On a hypothetical loan of $400,000, at a hypothetical note rate of 6 percent, for 360 months, the formula produces principal and interest of $2,398.20. At a hypothetical 5 percent, the same loan and term produce $2,147.29. At a hypothetical 7 percent, they produce $2,661.21. The gap between the 5 percent and 7 percent payments is a bit more than $500 a month on that hypothetical balance. The gap is the reason people care about the rate. It is not a statement that 5, 6, or 7 percent is the current average. Check the arithmetic if you want. Then throw the inputs away and replace them with a rate that has a source and a date.

The same hypothetical $400,000 at 6 percent over 15 years, which is 180 months, produces principal and interest of about $3,375.43. The monthly payment is higher. The total interest over the life of the loan is lower, and the balance falls faster. Choosing 15 years is not a way of saying the interest rate “does more.” It is a way of choosing a different amortization. A reader comparing a 15-year quote with a 30-year quote has to say both the rate and the term. Comparing the rates alone will flatter the shorter loan. Comparing the monthly payments alone will flatter the longer one.

What the FRED page is actually showing

Open the MORTGAGE30US page and read the header before you read the latest number. The title tells you it is a 30-year fixed-rate average. The source line tells you who produces the underlying survey. The units tell you that a printed value of, for example, 6.5 means 6.5 percent, not 6.5 dollars and not an index level of 6.5. The frequency tells you the observation is weekly, so two stories about “this month’s rate” may be talking about different weeks. The observation date is the date to write in your notes. A chart that ends last week is not a forecast of next week.

The page also shows a history. A history is the right tool for a sentence about change, such as the average being higher or lower than it was a year earlier. Compute that change from two dated observations, and name both dates. Do not describe the change by memory. The page will often show revisions or updated values according to its own practices. If you cite it, cite the retrieval date as well as the observation date, so a later reader knows which vintage you saw. That is ordinary care with a public series, and it is the same care the entry on reading a housing data release asks for from price and sales releases.

What the series will not do is underwrite the reader. It does not know the loan-to-value, the credit score, the property type, the occupancy, the points, or the lender’s margin. Two borrowers on the same day can be offered rates on either side of the average. A borrower can also be offered the average and still have a payment that does not fit the budget, because the payment depends on the loan amount. Use the series to stop a false national claim. Use a Loan Estimate to see a rate that has actually been attached to a file. Use neither one as a promise about next quarter.

Points, credits, and the rate you are shown

Discount points are interest paid at closing in exchange for a lower note rate. A lender credit is money applied against closing costs, often in exchange for a higher note rate. The closing-cost entry treats the cash side of that trade. The payment side belongs here. A lower rate from points reduces principal and interest every month and increases cash due at closing. A higher rate from a credit does the opposite. The annual percentage rate moves closer together than the note rates do, because it is trying to reflect the upfront money. It will not make the monthly payments equal. The household pays the monthly payment, not the annual percentage rate.

There is no universal break-even point worth memorizing. Suppose, as a labeled illustration and not a market quote, that one worksheet rate is 6 percent and another is 6.25 percent on the same hypothetical $400,000, 30-year loan. The formula puts the second principal-and-interest payment about $65 a month higher. Whether it is worth paying points to avoid that difference depends on the points actually charged and on how long the loan remains outstanding. If the loan is refinanced or the house is sold soon, the upfront points have fewer months in which to earn their keep. This paragraph deliberately stops before dividing a real fee by $65, because the fee was not stated. Bring the fee from the Loan Estimate, then divide.

Adjustable-rate loans need a different reading entirely. The formula above assumes the note rate stays put. An adjustable rate can change at resets described in the note, subject to caps that are also described in the note. FRED’s MORTGAGE30US series is not the index those adjustments use. If a Loan Estimate is for an adjustable product, read the section that states how the rate can change and what the payment could become under the form’s examples. Do not amortize the start rate over 30 years and call the result the payment. The start rate is a beginning, and the form is required to say more than the beginning.

Principal and interest are not the housing payment

The check, or the automatic withdrawal, is often principal, interest, taxes, and insurance, and it may include mortgage insurance. Lenders and borrowers sometimes call that fuller amount the housing payment. Principal and interest are only the loan piece. A reader who takes the $2,398.20 hypothetical from the worksheet and calls it “the payment” has skipped taxes and insurance that, on many houses, are large. This entry will not fill those in with a national average. A tax bill and an insurance quote are local documents. In California, the property-tax entry explains why two houses with similar prices can carry very different assessed values, and therefore different general levies. That difference never appears inside the interest formula.

Escrow changes the way the household experiences taxes and insurance. It does not change the fact that those bills exist. A loan without escrow can show a lower monthly withdrawal and a household that must save for the tax bill on its own. Comparing a payment with escrow to a rent check is already a comparison of unlike things. Comparing a principal-and-interest figure to a rent check is one step further from the cash the owner will spend. The rent-or-buy entry sets up a fuller comparison. The contribution of this page is to keep the interest math honest so it can be dropped into that comparison without contaminating it.

Mortgage insurance, when it is charged monthly, sits in the housing payment and is not interest. It does not build equity. It can be temporary under rules the mortgage-insurance entry summarizes and the CFPB states. A payment comparison that includes it for the first year and forgets that the form may show it ending later, or the reverse, will misstate the middle years. Read the projected-payments columns. They exist so the first year’s withdrawal is not mistaken for every later year.

How a rate change moves a payment, and how it does not

The worksheet already showed the shape of a rate change on a fixed balance and term. A higher rate raises the payment and raises the share of each early payment that is interest. It does not change the contract price. It does not change last year’s house-price index. It can change how much a given income can borrow, which is one reason affordability measures move when rates move. The affordability entry explains why an index can move for that reason without describing a particular household. Here it is enough to see that a rate is a price of borrowing, and that the payment formula is where that price becomes a monthly dollar figure on a stated balance.

A rate change does not rewrite a fixed-rate note that has already closed. The national average can rise after a purchase without changing that borrower’s principal and interest. The average can fall without delivering a refinance. A refinance is a new loan, with new closing costs, a new rate, and a new term, all of which have to be read on a new Loan Estimate. People sometimes talk as if “rates” were a single dial attached to every existing mortgage. The dial is attached to new offers. Existing fixed-rate notes keep the rate in the note.

Prepayment changes the interest a borrower pays in total, and it does not change the contracted rate. Paying extra principal reduces the balance and can shorten the life of the loan. The next month’s contractual payment on a standard fixed-rate mortgage usually stays the same unless the servicer and the note provide a recast. This page does not describe a particular servicer’s recast policy. It separates two ideas that get fused: the rate, which is a percent in the note, and the total interest paid, which also depends on time and on the balance. Extra principal attacks the second. It does not amend the first.

A way to quote a rate without overclaiming

If you write a sentence about the national market, open MORTGAGE30US, record the value and the observation date, and say that it is the weekly average 30-year fixed rate as FRED presents it. If you write a sentence about a loan you might take, use the Loan Estimate and record the lender, the note rate, the annual percentage rate, the points or credit, the loan amount, and the term. If you write a sentence about a payment, say whether you mean principal and interest or the fuller housing payment. Those three sentence types use three sources. Mixing them is how a weekly average becomes, incorrectly, someone’s mortgage bill.

The hypothetical figures on this page are for audit. $2,398.20 is the principal and interest on a $400,000 loan at 6 percent for 30 years under the standard formula, rounded to the cent. It is not a payment anyone has been approved for, and 6 percent is not a claim about the week you are reading this. When the paragraph has done its teaching, retire the inputs. Suneet Singal is not, by publishing the formula, offering a rate or advising a reader to borrow. A reader who wants a personal figure needs a lender or a housing counselor and a current estimate. A reader who wants the national average needs the FRED page, opened again, because the number moves and this sentence will not move with it.

What this entry does not claim

Suneet Singal’s published professional background is in real estate and corporate finance. Company filings linked from this site record a chief executive officer departure from FC Global Realty Incorporated effective 2 January 2018 and an acting chief executive officer appointment at First Capital Investment Corporation effective 12 September 2017. The Suneet Singal Scholarship, Grant and Giving websites describe him as the founder of those programs. This entry explains a general subject. It is not a private track record, a current job title, an investment result, or a quote.

Continue with what a down payment changes, closing costs, and a rent-or-buy framework.