Township Council Meeting — Packet

What is Municipal Debt? (cont.) • Municipal debt can best be compared to a resident’s mortgage. Most homeowners do not have the funds to pay cash for their home, so they go to a bank and get a longterm loan (i.e. a mortgage). The homeowner pays principal and interest every month until the loan is repaid. • The interest rate on the loan determines the amount of interest the homeowner will pay over the life of the loan. For example, a 30-year mortgage for $500,000 at 5% will cost the homeowner $465,000 in interest. If the rate moves up 1%, then the homeowner will pay $580,000 in interest over the life of the loan. • Just as market conditions can raise or reduce interest rates for homeowners, the Township’s short and long-term debt is impacted by changes in the municipal bond market. As rates climb, the Township’s debt service expense will increase and will generally be passed along to the taxpayer. • Due to the size and credit rating of municipal entities, municipal bond rates are generally lower than those of a resident. For example, a 30-year mortgage rate is currently 6.25% and a 30-year tax-exempt municipal bond rate is currently 4.25%. 5