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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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