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The Cost of a Mortgage
The
cost of a mortgage depends on the amount you borrow, the interest you pay,
and how long you take to repay.
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 Since monthly payments
spread the cost of a mortgage over a long period of time, it's easy to forget
the total expense. For example, if you borrow $100,000 for 30 years at 6.5%
interest, your total repayment will be around $227,545, more than two and
a quarter times the original loan.
Minor differences in the interest rate — 6.5% vs. 6% — can add
up to a lot of money over 30 years. At 6% the total repaid would be
$215,842, about $11,703 less than at the 6.5% rate. Of course, many
borrowers refinance or sell before the end of the loan term, so the differences
between the rates are less dramatic.
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CUTTING
MORTGAGE EXPENSES You can reduce your cost several ways.
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Consider a shorter mortgage. With a shorter term, you'll pay less interest overall, and your
monthly payments will be somewhat larger. A 15-year mortgage, as opposed
to a 30-year mortgage for the same amount, can cut your total cost by
more than 55%. Some banks offer 20-year or 25-year mortgages, which
reduce the overall interest cost without significantly raising monthly
payments. At the other end of the scale, some lenders are also offering
10-year loans, which can be affordable when the interest rate is low.
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Consider amortizing, or paying
off, the loan faster. You can pay your mortgage bi-weekly instead
of monthly, or you can make an additional payment each month.
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With bi-weekly payments you
make 26 regular payments instead of 12 every year. The mortgage is
paid off more quickly, and you pay less interest. But you may have
to pay higher fees to arrange and follow this payment schedule.
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You can make an additional payment each month to reduce your principal. With a fixed-rate mortgage, you
pay off the loan quicker, but regular monthly payments remain the
same. With an adjustable-rate mortgage (ARM), interest is figured
on a smaller principal each time the rate is adjusted, so your monthly
payments could become lower.
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Be sure the lender
knows you want the extra payments credited toward the principal. Your
mortgage bill should have a line for entering the additional amount, and
you can send a separate check. When you pay extra, you can change the
amount or stop at any time.
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The catch to additional
payments: You may come out ahead by investing your extra cash elsewhere.
This is especially true in the last years of a fixed-rate loan, when you're
paying off mostly principal so you can't reduce the interest cost by very
much. |
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© 2006 by Lightbulb Press, Inc.
All Rights Reserved.
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