Have you ever wondered what the difference a 1% can make when it comes to interest rates? Do ya feel the hook in your lip yet?
Transcript: Hi this is Jeff Brown the “Bawld Guy”. Today we’re going to talk about interest rates and let’s stop fretting about higher or lower interest rates on a particular investment. Here’s why. Most people I tell that if you can pay something off sooner, it’s better. It adds a lot of options to your menu down the road, and the more options you have the better chance you have of winning and winning sooner in your plan. So, here’s an example. You buy a property: you pay $250,000, you put 20% down and you get a $200,000 loan, thirty years, fixed rate 4%. OK, your payments are $950 something a month. You can add, because you make a lot of money, $2,000 a month out of the family budget. You’re going to pay that loan down really fast. Now I happen to know how fast you’re going to do it because I brought my brains with me. Now my 12C tells me when you pay an extra $2,000 on that $200,000 4% loan, that it will pay off completely in seventy-seven easy payments, but wait a minute. You delayed making a decision on that property, and you didn’t buy it until rates zoomed up to 5%. Now you’re more than perplexed. Besides being really irritated, you want to know, Jeff, how much longer is it going to take me when I add that $2,000? And, Jeff’s going to tell you, and here’s the bottom line, seventy-seven months just like at 4%. I’ve won drinks, many drinks, with this bar bet. It doesn’t matter. Your payment’s going to be a little bit more. OK? Maybe fifty to a hundred bucks and depending on the case, how much the interest rate went up, did the loan $200,000, $150,000, $300,000; whatever it is, but the bottom line is most of the time when you’re adding money from another source to pay down a loan sooner rather than later, the difference in interest rate will make from no difference to two or three months max, and so here was a case where you had a full percentage point higher and it made no difference. To make it more dramatic, the interest went up 25%, 4 to 5%, and you didn’t lose one month. So just understand, things aren’t always what they appear to be. Don’t count on your intuition. Do the analysis every time. If you don’t do the analysis, you can’t know the answers and you can’t stop yourself from making a mistake. This is Jeff Brown, the BawldGuy. Thanks for watching. We’ll catch you next time.