The total cost of a mortgage is determined by many factors; how much you can put down, your credit rating, the type of rate you decide on and the current interest rates. The term of your mortgage or how long you take to pay back the loan can affect your overall financial picture more than you would expect.
Conventionally, mortgages are paid back over 30 years. This makes the monthly payments more affordable. But by cutting down on that time period by even only 5 years, you can save a lot of money.
Advantages of 25 Year Mortgages
Take, for example, the case where you were going to take out a mortgage for $250,000 at 6.49% interest for 30 years. Your monthly payment would $1,578.53. By the time you finished paying on this debt, thirty years later, you would have paid $318,269 in interest.
Now lets take the exact same loan but change the term from 30 years to 25. Your payment would be slightly higher, $1,668.36 but at the end of 25 years you would have paid only $255,936 in interest. And now you own your home five years sooner.
But, you may say, I don’t intend to stay in my home for 30 or even 25 years. Very few of us stay in one place that long but even in the short term there are benefits.
Lets say that you sell your home after 7 years. With the 25 year loan your balance is $208,061 and you’ve paid a total of $119,961 in interest over the 7 years. With the 30 year loan, your balance is $221,598 and you’ve paid $123,137 in interest.
The total amount extra you’ve paid over the 7 years with the higher payment is $7,545.72. That the difference between the 30 year monthly payment ($1,578.53) and the 25 year payment ($1,668.36) x 12 months x 7 years.
But, when you sell your home you have an extra $13,537 in equity. That’s almost $6,000 extra dollars. But this analysis wouldn’t be complete without taking into account what you could have done with that money if you’d invested it.
Lets say that you took the extra $1,077.96 every year and put it into a money market account where you were guaranteed 4.8% compound interest. That gives you $9,142 as your account balance at the end of the 7 years. With the 25 year fixed rate mortgage, you’re still ahead by about $4,000.
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