Narrator: When most people

buy a house they need to borrow money for some part of

the purchase price of the house. Let’s say that we have

a house right over here and the purchase price is $200,000, and I want to buy this house,

and I’ve saved up $40,000. I have saved up $40,000,

so this is my savings, so I will use this as a down payment, but I still need to borrow the rest of the money in order to get to $200,000. I’m going to have to get the

balance, the $160,000 as a loan. The type of loan that

people that people will get, or that they usually get to buy

a house is called a mortgage. Mortgage. A mortgage is really just a loan where if you don’t pay the loan off, the person that you borrowed

the money from gets the house. Another way to think

about it is it’s a loan that’s secured by the house

until you pay off the loan. When you pay off the loan

it is your house to keep, but at any point if you don’t pay it, the bank could come and take the house, and that is called a foreclosure. Now, what I want to focus on in this video is the types of mortgage

loans you will typically see, and give you at least the beginning of an understanding of how to understand what these different types of loans mean. In all of these scenarios,

let’s just assume that I’m in the market to borrow $160,000 for this house I’m about to buy. If you look at any

financial website or any of the major search-web portals, they’ll give you quotes

for mortgage rates. You’ll see something like this. I made these numbers really simple. Normally, you’ll have some decimals here;

5.25%, 4.18%. I made these numbers a little bit

simpler just to make them simpler. These are the typical types

of mortgage you will see, but if you contact mortgage

broker they will have many, many more types, more exotic types; but these are the most common and this is what we’ll

cover in this video. Hopefully they’ll give you a sense of what the other types

of mortgage is like. A 30 year fixed mortgage

means that your payment and your interest rate

are fixed over 30 years, and over the course of those 30

years you will pay off your loan. In this situation, this is a 30 … Let me write it over here, let’s

think about a 30 year fixed. 30 year fixed mortgage.

What will happen is you will have a fixed mortgage

payment every month, and I’ll draw a little bar graph

to show the size of your payment. You’ll see why I’m doing that in a second. Let me just draw a little

bit of a graph here. Each of these blocks represent your monthly payment for that month; and I’m just going to make up the

number, let’s say it is $2,000. I actually haven’t figured out the math of what is the exact

payment for a 30 year fixed with a 5% interest rate for $160,000; but, let’s just say, for the sake

of simplicity, it’s $2,000 a month. This height right over here,

let me make it like this. This is $2,000 a month. $2,000. This is month 1, then you

will pay $2,000 in month 2. So on and so forth, all the way. If you have 30 years times 12 months, you’re going to get all

the way to month 360; and that is going to be your last payment. Month 360 is the last payment in year 30, and you would have paid off your loan. The interesting thing here

is in the first month, since you’ve borrowed

so much from the bank, you’ve borrowed $160,000, the interest that you have to pay on it

is going to be pretty large. Most of the initial payments

are going to be interest. I’m going to do the interest

in this magenta color. In that first payment. Oh, that’s

not magenta. This is magenta. In that first payment it’s

going to be mostly interest. You’re going to pay a little

bit off of the actual loan; so that right there is

your principle payment. Let’s say, after that first

month, the principle part of that $2,000 is, and

I’m just making up numbers for the sake of simplicity,

let’s say that is $200, and the interest portion is $1,800. I’m not actually working it

through with these assumptions. You don’t even have to assume

that’s a $160,000 loan, but the general idea here

is after this first month you would have paid $200 off of your loan. If it was $160,000 loan,

after that fist month, you don’t owe $160,000 minus 2,000, because 1,800 of that was interest. You now owe $160,000 minus

$200, so you now owe $159,800. In the next period your interest

is going to be a little bit lower. It’s going to be just a little bit lower, and your principle, since you’re paying the same fixed payment

of $2,000 every month, is going to be a little bit higher. Maybe it’s going to be, in the next month, something slightly higher;

I don’t know, $202. You keep going like that

and the math works out; they figure out the payment

so that by that last payment you’re paying

very little interest, you’re paying very little interest, and most of that last

payment is principle. It’s actually being used for the loan, and then after that last

payment, the loan is paid off. This will happen over 30

years; this is a 30 year term. A 15 year fixed is the same exact idea, except instead of it taking 30 years to pay off the loan, you’re

going to do it over 15 years. Instead of it being 360 months, in the 15 year case, it

is going to be 180 months; and because of that,

your payment for the same loan amount is going to

be higher every month because you’re paying it off quicker. You’re paying it off in fewer months. Instead of $2,000 a month,

maybe it is something like $2,800 a month for the 15 year case. You’re paying it off quicker. The 5/1 ARM case, and you’ll see, and there are many types of ARMs, and I’m going to explain to

you in a second what an ARM is, but the 5/1 is the most typical. I’ll explain what that means in a second. ARM means ‘Adjustable Rate Mortgage.’ Adjdustable Rate Mortgage As you see, in these situations we had the word ‘fixed,’ and

they were called fixed because the interest rate was fixed; whatever your remaining

loan balance was you paid the same fixed amount of

interest for the next period. For this 30 year fixed,

we are being quoted a 5% fixed rate over the next

30 years; will not change. For the 15 year, we’re

quoted a 4% fixed rate. For the ARM, the rate can change. When someone tells you about a 5/1 ARM, they’re actually talking about

something called a hybrid ARM; but, the general idea behind an adjustable rate mortgage is the

amount of interest you pay on your remaining balance will change. It will change according to some index. The most typical types of

adjustable rate mortgages are things like this hybrid

ARM; so this is a hybrid. A hybrid, it’s viewed as

a mixture of 2 things, or a combination of 2 things. What a hybrid adjustable rate mortgage is it has fixed rate for some period of time. In this case, it’s a

fixed rate for 5 years, then the interest rate

can change once a year after that, or every 1 years after that. That’s what this right

over here is telling you. In the case of an adjustable rate mortgage your payment might look

something like this, and I’ll just make up

numbers for simplicity just to give you the flavor

of what it might look like. In the case of a 5/1, your

first 5 years are fixed. Your first 5 years. Month 1

is going to look like that. Month 2 is going to look like that. You go all the way to month 60, which is the last month in the 5 years and it’s going to look like that. That’s 1, that’s month

2, that is month 60. This is the course of 5 years. This is over the course of 5 years. Over the course of 5 years,

the idea is fairly similar. You’re going to pay, some

part of this is going to be interest, and the remainder is going to actually be used to pay down the loan. Each month you’re going to pay down a little bit more of the loan, and you’re going to have to pay a

little less in interest. Make that a little bit bigger. You’re going to have to pay

a little bit less interest, because you have less

remaining on your loan, but by year 5, or month 60, you

still haven’t paid your loan off. Maybe the interest is right over there, and actually it’ll probably

be higher than that. I don’t want to be too exact, but maybe your interest is

going to be right over here; and this is what you’re

paying down from the loan. For a hybrid adjustable rate mortgage, after that 5 year period, the bank can now change the interest rate. The interest rate is going to be dependent on some kind of underlying thing that everyone is paying attention to. That underlying thing

increases in interest. In this 5/1 ARM, it starts

off at a 3% interest. If, because of the thing that we’re paying attention to, and I’ll talk

more about that in a second, interest rates all of a sudden go up. Let’s say they go up a

lot, then all of a sudden your payment could increase. Your payment could increase

because the general idea behind a 5/1 ARM

is that you are still going to pay it off in 30 years. They typically, I should

say, have a 30 year term. If you just stick with this loan, you never try to borrow other money to replace this loan, which

is called a refinance, if you just stick with this

loan it will take you 30 years to pay it off, but after the first 5 years the amount of interest

you pay might actually change, so your payment

might actually change. If the interest rate

goes up, all of a sudden you might have to pay a lot more interest all of a sudden in month 61, or in year 6. Let me do that in, I can do that

part in that same blue color. For year 6, since this is a 5/1 ARM, they can’t change the interest

rate again until year 7, so you’ll pay this constant

amount until year 7. Then, they can change the rate again. There usually are some caps on how much they can

change the rate each year, or how much they can

change the rate in total; but it is a little bit riskier because you really don’t know

what your payment might be in year 6, or year 7, especially

if interest rates go up a lot. Now, you might be asking what determines what that new interest rate

is in after the 5 years. They usually pick some type of index. The most typical are,

especially in the United States, treasury securities; so,

they’ll look at the 10 year interest rate that

essentially the government has to pay when it borrows money, and they’ll usually take

some premium over this. If the 10 year treasury is at 2%, the bank might put in your loan documents that after the initial

5 year fixed period, you will pay 10 year treasury rate plus, maybe you’ll pay that plus 1%. You start off paying the 3%, that’s fixed even if the treasury does

all sorts of crazy things, even if it goes up to

5%, you’re just going to keep paying the 3%

for the first 5 years, but then in that 6th year, let’s say that, let me write it over here, let’s say that in year 6

the treasury security rate now has bumped up to 4%, then by contract, by what’s in your loan document, you’re going to have to pay that plus 1%. Now, your mortgage is

going to reset to have a 5% rate, have a higher rate. You might get lucky, though. Maybe the treasury rate goes down, maybe it goes to 1%,

and then your mortgage rate would actually be 1% plus 1%, so it could actually go down to 2%. But the general idea is

that’s a little riskier, because you really don’t know how predictable that

payment’s going to be. Most times, if you look

at quoted interest rates, you’ll see that the 30

year fixed rate is higher than the 15 year fixed rate, which

is higher than the adjustable rate. That’s because the bank, there’s a couple of different forms of risk,

but the bank is taking the least amount of risk

on the adjustable rate mortgage, and taking the most

risk on the 30 year fixed. The biggest risk here, there’s

the risk that you don’t pay it off; but that’s

why they like to see a down payment, because they can get the house back and

hopefully the house doesn’t devalue by more than your down payment. But, even more than that,

there’s an interest rate risk. Because what happens if

the bank lends you money, lends you a big chunk of money at 5%, and that interest rates go up to 6%, 7%, what if they go up to 10%? What if the bank’s borrowing cost, the amount of money the

bank has to pay people to borrow money, goes up to 10%? Then it will be taking

a loss on your loan, and they’re fixing it

for so long, that’s why they want to make up for some of that risk by charging you higher interest. A 15 year loan? A little bit less risk, so they’ll have a little

bit lower interest. A 5/1 ARM? Even lower risk. They’re only fixed for 5 years, and then after that this will float with the prevailing interest

rate on an annual basis. Hopefully that gives you

a little bit of a primer of mortgage interest

rates, but I want to really make sure that you don’t, just this video isn’t all you need to take out a loan. It’s super important to

read the fine details on what’s happening with that loan, especially if you’re

buying something more, if you’re taking out a more exotic loan like an adjustable rate mortgage, or an interest-only

loan, or an option ARM, or any of those more exotic things.

First

First

you are so helpful! thank you!! 🙂

interesting

So the typical mortgage period in usa is 30 years? That's crazy.

But what is insane is that in Sweden many ppl only pay the interest.

dear people banks are fucking with you big time.

Keep up the good work, Sal! You're on the right path. I certainly welcome that video

p.s. when i have posted this link on the facebook it said:

Message Failed

This message contains blocked content that has previously been flagged as abusive or spammy. Let us know if you think this is an error.

$2000 is way higher that it would be.

@Hokke88 What's normal in your country?

Im home-schooled,and Sal,You do better for me than a tutor,text-book,Or one of them stupid DVD's that seem like they are for 6 year olds….It feels like he talking TO you and he knows what questions you have to ask,AND HE ANSWERS THEM…I never got an answer back from my textbook when I asked What does (that ?>>>?>?) Mean???? Thanks!

Making money out of a fictitious item? Hmmmm that just seems stupid.

Sal.. It would be of immense help if you do some videos in micro and macro economics..

So lets take this into a real life scenario. Right now the US interest rates are at all time lows, and staying low, and because bonds do the inverse they are rising. Lets say in 3-5 years when people realize how much debt the US is in they decide to stop buying bonds and they start to decrease in value. Does this mean interest rates would naturally rise and put higher payments on houses with 5/1ARM potentially forcing more people into foreclosure that bought during this low interest period?

Am i right the way i explained bonds have to decrease for interest rates to raise? or is it interest rates have to raise for bonds to decrease? And how is this a free market if the fed is able to announce interest rate prices? At what point does the fed not have control over true supply and demand? Please anyone answer i am trying to really get an understanding of this.

Mortgages are a form of slavery ….Best days , rough , no CCTV , just free ,,, poor but free , now days we have iPhones , new tech , is that really better I don't know , we are all to busy paying our mortgages for life , retire at 67, finally paddy your property onto your son who has to pay 70% inheritance tax . We work so others live ,,,,, years back we all lived ,,, we all saw one anoughter more often , now it's all to fast . We are all being lubricated to get us through with plastic foods ,

thanks man.

This idiot did not even do the financial calculations. What is the point of the video.

Is there anyway we can see some calculations?

What place does the rate have in this video besides the board?

So easy to understand. Thanks for your help

Thank you!

If one have to pay 2K per month in which 200 will be the principal. It is understood. But if I pay 200 extra, in that month, would that be added straight into the principal or do they cut the interest from that extra money as well?

It is in reality way more complicated than his teaching but it has the general ideas and concepts of market rates. Two thumbs up for Khan. Thank you.

Thank so much for such an easy-to-understand explanation!

Get current mortgage interest rates

I Watched this post. this post have a good information about Mortgage Rates. i am also Mortgage Agent thanks for share this information. i am also giving this information. here my sites buy home in affordable price this is Mortgage Agent service

http://www.mortgagerates-preapproval.com/current-mortgage-loan-interest-rates

in mortgage loan which interest rate should we go for floating or fixed.. please advise sir

All of this is great fancy talk but i you want to save thousands of dollars that you toss to the lenders use this tool www.parlend.com and find the lowest mortgage rate anonymously

So I followed through the entire 14:17 minutes, and you still have not explained what is a interest rate.

Video would be much better if the numbers used were consistent.

So tell me…., how much interest is paid on the first 30 years loan? Just the interest.

I bought a house for 90k my total amount of interest at 10 percent will be 166,000 dollars…I just shook my head when I re-read the contract…should I just count my losses and look into buying something else? They did an in-house finance since my credit was bad so it won't show on my credit if I just ditch the house and have a fresh start, they let me have it with no Vaseline so people, do your research before signing anything…hire a lawyer.