Most conventional mortgages are fixed rate 30 year loans but a shorter term loan could make a big difference for you financially. Let’s look at two examples. The Smith family and the Jones family both buy houses at the same time. We’ll assume that they’re in the same area and they have both taken out mortgages of $225,000.
The Smith’s take out a 30 year mortgage in April of 2006, so their interest rate is 6.43%. They make their first payment of $1,411.81 and everyone celebrates. They realize that they have enough money in their budget to buy a new car.
The Jones decide that a 15 year mortgage is a better long term strategy. The bank give them a rate of 6.10% because the shorter term means less risk. The Jones start making their payments of $1,910.86 a month in April of 2006. It’s a struggle to put out that extra $500 a month but they decide to drive around in their old car for a few more years.
Now lets fast forward to the year 2021. The Jones make their last payment and now they own their home free and clear. They’ve got an extra $1,900 every month. They decide to keep putting that money in the bank every month for the next 15 years. The account that they put it in has an interest rate of 4.8%. 507,913.16
Meanwhile the Smiths are still making their monthly payments of $1,411.81. In 2021 they still owe $162,789 on the original loan.
Fast forward once again to 2036. The Smiths finally own their home free and clear. The Jones also own their home free and clear but they also have a nest egg of $507,913. That’s the difference the terms of your mortgage can have on your financial future. The Jones pay off their children’s college loans and retire to Costa Rica. The Smiths children take out huge loans and the Smiths’ can’t retire for a many years.
There are many different types of mortgages available and its important to understand how the terms of your mortgage affect your financial picture. Many mortgage web sites have payment calculators. Before you shop around for mortgage, get an idea of how much different types of loans will cost. And don’t just focus on that monthly payment. Sometimes the extra monthly payment can pay off in the long term.
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