In
the past, the 30-year, fixed-rate mortgage was
the standard choice for most homebuyers. Today,
however, lenders offer a wide array of loan
types in varying lengths--including 15, 20,
30 and even 40-year mortgages.
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--f
otal 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.
