Most mortgages are paid back over thirty years. The long loan life makes for smaller, more affordable monthly payments. But if you want to gain equity quickly, you might want to look at a shorter pay back time.
There are two ways you save with this type of loan. First you pay less interest because you make fewer payments but you also save because the interest rates are usually lower for this type of mortgage.
Over the life a loan, the difference between the interest on the 30 year and the 10 year mortgage could almost pay for another house. Don’t believe it? Let’s take a look at the numbers.
If you took out a 30 year fixed rate mortgage in January of 2006, the rate would be around 6.15%. Let’s say the mortgage was for $200,000. Your monthly payments on this loan without adding in taxes and insurance would be $1,218.46. By the time you made your last payment in 2036 you would have paid a staggering $238,644 in interest. On top of that you still have paid off the original $200,000.
Now during that same time period, a 10 year fixed rate mortgage would have an interest rate of 5.71%. If we borrowed the same $200,000 but paid it back in 10 years the monthly payment, again without taxes or insurance, would be $2,191.40. What do you buy with that extra $972 a month? Over the long haul you gain a lot.
By the time you paid off your loan in 2016, a full 20 years sooner, you’ve paid only $62,967 in interest. That’s a savings of $175,677 in interest. And by owning your home that much sooner, you could take the money you would have been paying on a mortgage and invest it. With 20 years to accumulate, at the end of same 30-year period you could be doing quite well.
One way to make that extra payment affordable is to buy a smaller, less expensive house to begin with. It may be difficult in today’s real estate market to find affordable starter houses but searching out a bargain and then paying it off quickly can give you the equity later on to move up to a larger home.
Find out about all your mortgage options before you talk to a lending institution. They won’t understand your financial goals. Despite what the ads say, the loan officers are more interested in closing on a loan than analyzing what’s the best fit for you.
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