Fifth Third Mortgage Co., a subsidiary of Fifth Third Bank, has a little mortgage promotion going on at the moment.
For a “limited time,” customers who take out a purchase-money mortgage can take either a 1% interest rate reduction for the first year of their mortgage, or a 1/8th percent (.125%) interest rate reduction for the life of the loan.
While this isn’t groundbreaking (I’d personally ask for my mortgage rate to be .125% cheaper anywhere), it allows us to take a look at the difference between an initial large discount, and a smaller life-of-loan discount to see how mortgage interest really works.
Let’s assume you take out a $200,000 mortgage on a 30-year fixed loan and plan to pay it off until maturity.
And let’s say they offer you a mortgage rate of 4.50%.
The Initial Mortgage Rate Reduction
So option one is to take a rate of 3.50% for the first year, and then 4.50% for the remaining 29 years.
Your fully-amortized mortgage payment would be $898.09 for the first 12 months, with roughly $7,000 in interest paid.
After that, you’d be making monthly payments of $993.92 for the remaining 29 years, with $161,649.47 in total interest paid.
So the grand total of mortgage interest over the full 30 years would be about $169,000.
The Smaller, Longer Mortgage Rate Reduction
Now if you went with option two, which would be a .125% rate reduction for the life of the loan, your rate of 4.375% would result in a monthly mortgage payment of $998.57 and $159,000 in total interest paid over the 30 years.
Long story short, you’d save roughly $10,000 by taking the smaller discount, assuming you paid off the loan in full.
Now, most homeowners either sell or refinance before their mortgages reach maturity, so it’s not as simple as it looks.
But I just wanted to illustrate the importance of a seemingly measly eight of a percentage point.
Fifth Third is also offering a .50% discount point savings (an estimated $750 savings) if the borrower agrees to automatically deduct the monthly mortgage payment from a Fifth Third Bank account.
The promotion goes until August 31, 2011. The company is the 13th largest loan originator, according to data from Inside Mortgage Finance.