Deciding what length is best for you should be based on several factors including: your purchasing power, your anticipated future income and how disciplined you want to be about paying off the mortgage.
What are the benefits of a
shorter loan term?
Some homeowners choose fixed-rate loans that are less than 30 years in
order to save money by paying less interest over the life of the loan. For
example, a $100,000 loan at 8 percent interest comes with a monthly payment of
around $734 (excluding taxes and homeowner's insurance). Over 30 years, this
adds up to $264,240. In other words, over the life of the loan you would pay a
whopping $164,240 just in interest.
With a 15-year loan, however, the monthly payments on the same loan would be approximately $956--for a total of $172,080. The monthly payments are more than $200 more than they would be for a 30-year mortgage, but over the life of the loan you would save more than $92,000.
What are the advantages to
a 30-year loan?
Despite the interest savings of a 15-year loan, they're not for everyone. For
one thing, the higher monthly payment might not allow some homeowners to
qualify for a house they could otherwise afford with the lower payments of a
30-year mortgage. The lower monthly payment can also provide a greater sense
of security in the event your future earning power might decrease.
Furthermore, with a little bit of financial discipline, there are a variety of methods that can help you pay off a 30-year loan faster with only a moderately higher monthly payment. One such choice is the biweekly mortgage payment plan, which is now offered by many lenders for both new and existing loans.
Biweekly mortgages
As the name implies, biweekly mortgage payments are made every two weeks
instead of once a month--which over a year works out to the equivalent of
making one extra monthly payment (compared to a traditional payment plan). One
extra payment a year may not sound like much, but it can really add up over
time. In fact, switching from a traditional payment plan to a biweekly
mortgage can actually shorten the term of a 30-year loan by several years and
save you thousands in interest.
If you're interested in a biweekly payment plan, make sure to check with your lender. In many cases, lenders also offer direct payment services that automatically withdraw funds from your bank account, saving you the trouble of having to write and mail a check every two weeks.
Making extra payments
yourself--do it early!
Another way to pay off your loan more quickly is to simply include extra funds
with your monthly payment. Most lenders will allow you to make extra payments
towards the principal balance of your loan without penalty. This is especially
attractive to homebuyers who are concerned about their future earning power,
but still want to be aggressive about paying off their loan.
For example, if you had a 30-year loan, you might decide to send the equivalent of one or two extra payments a year (which could shorten the overall length of the loan by many years). But if your financial situation suddenly took a turn for the worse, you could always fall back on the regular monthly payment.
One important note, though,
is that if you do decide to send extra funds, make sure to do it EARLY in the
life of the loan. This is because most home loans are calculated in such a way
that the first few years of payments are almost entirely interest, while the
last few years are mostly applied towards the principal balance. Thus, you can
get the most bang for your buck by making the extra payments early in the life
of the loan.
|
Mike Munson Broker/ REALTORŪ |
| Realty Executives Alexandria Home Sales |
| Alexandria MN 56308 |
| 320-763-7902 |
| Toll Free: 866-336-2643 |
| Munson@alexhomesales.com |
| Each Realty Executives Office Is Independently Owned and Operated Information is deemed reliable but not guaranteed |