the past, the 30-year, fixed-rate mortgage was the
standard choice for most home buyers. Today, however,
lenders offer a wide array of loan types in varying
lengths--including 15, 20, 30 and even 40-year mortgages.
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.
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.
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
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.
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.
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
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
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 home buyers.
who are concerned about their future earning power,
but still want to be aggressive about paying off their
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.
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.
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