Borrowing money to buy a home is sometimes necessary. You’ll be investing in your own future, building equity, creating the life you want to live. But it’s vital that you compare mortgage terms before taking on any home loan. As you get ready to buy your first or next home, consider these tips to either afford more home or lower your costs dramatically.
Years Make a Big Difference
Overall, with a shorter-term (number of years) loan, your monthly payments will be higher, but you’ll pay less for the loan. The longer the term, the more home you’ll be able to afford when calculating your Loan to Value (LTV) ratio, but the more you’ll pay overall in interest due to a higher rate and more time paying the loan.
Do the Math
Using one of the First Tech mortgage calculators, let’s compare a 10-, 15-, and 30-year mortgage before going over the benefits of each one.
|Term (Fixed Rate Loan)||Annual Percentage Rate (APR)||Monthly Payment||Total Interest Paid Over Life of Loan|
In our example, we’re applying for a home valued at $400,000 with a 20% down payment of $80,000. To simplify the example, no taxes or insurance charges were added to the calculation, no discount points were added, and an origination fee of $1,600 was applied to each loan.
If you can make the $3,225 monthly payments, qualifying for a 10-year mortgage saves you over $231,000 when compared to a 30-year fixed loan. Those are some huge savings.
But if you’re a first-time home buyer, a 30-year mortgage may be the only way to qualify for the loan. That doesn’t mean you can’t whittle down the total interest payments. All you need to do is pay a little extra every month.
Paying an additional $500 every month would save you $128,094 in interest charges. Plus, you still have the option to skip those added payments if money gets tight one month or you need to apply that income to something else. Bonus: by making extra $500 payments you’ll pay off your loan 11.5 years early.
Benefits and Setbacks of Shorter Terms
Numbers don’t lie. With a shorter term loan, you’ll pay less in overall interest. Plus, you’ll build equity more quickly, and you’ll have your mortgage paid off sooner. However, those higher monthly payments could keep you from buying other things you need, or traveling as much as you’d like.
Benefits and Setbacks of a 30-Year Mortgage
You’ll pay less every month, which means you’ll have more income to apply toward your future. Plus, if life ever catches you off guard (loss of a job, disability, etc.), you’ll have some room in your monthly income to carefully navigate the situation. However, if you only make those minimum payments for the full 30 years, you’ll be paying hundreds of thousands of dollars in interest payments.