Your Retirement Center
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.
House 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.

 
FIGURING MORTGAGE COSTS

Term
The length of time you borrow the money for is known as the loan term. The longer the term, the lower the monthly payments, but the more you'll pay in the end.


Rate
The interest rate may be fixed for the length of the loan or adjusted periodically to reflect prevailing interest rates.

Bottom line : Any of the factors will increase the overall cost, but a higher interest rate and longer term will have the greatest impact.


CUTTING MORTGAGE EXPENSES You can reduce your cost several ways.
bullet 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.

bullet2 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.


 
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.


 
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.
  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.
  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.

 
THE EFFECT OF THE TERM ON A $100,000 MORTGAGE

Monthly amount at different interest rates
Term 6.5% 7.0% 7.5% 8.0%
15-year $871
Total Payment
 
A POINT WELL TAKEN
Lenders might be willing to raise the rate by a fraction (say 1/8% or 1/4%) and lower the points — or the reverse — as long as they make the same profit.

The advantages of fewer points are lower closing costs and laying out less money when you're apt to need it most. But if you plan to keep the house longer than five to seven years, paying more points to get a lower interest rate will reduce your long-term cost.

The following chart shows the effect of points and interest on a 30-year, $100,000 mortgage:



LOAN A LOAN B

Years 1–4: Loan A (higher interest rate but fewer points) costs less.
Year 5: Loan B's lower interest rate compensates for the higher initial points, and begins to cost less. The longer you have the mortgage, the cheaper Loan B becomes compared to Loan A.

 

 

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