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In
the past, the 30-year, fixed-rate mortgage was the
standard choice for most homebuyers. Today, however,
lenders offer a wide array of loan types in varying
lengths--including 15, 20, 30 and even 40-year mortgages.
Deciding
what length is best for you should be based on several
factors including: your purchasing power, your anticipated
future income and how disciplined you want to be about
paying off the mortgage.
What
are the benefits of a shorter loan term?
Some homeowners choose fixed-rate loans that are less
than 30 years in order to save money by paying less
interest over the life of the loan. For example, a
$100,000 loan at 8 percent interest comes with a monthly
payment of around $734 (excluding taxes and homeowner's
insurance). Over 30 years, this adds up to $264,240.
In other words, over the life of the loan you would
pay a whopping $164,240 just in interest.
With a 15-year loan, however, the monthly payments
on the same loan would be approximately $956--for
a total of $172,080. The monthly payments are more
than $200 more than they would be for a 30-year mortgage,
but over the life of the loan you would save more
than $92,000.
What
are the advantages to a 30-year loan?
Despite the interest savings of a 15-year loan, they're
not for everyone. For one thing, the higher monthly
payment might not allow some homeowners to qualify
for a house they could otherwise afford with the lower
payments of a 30-year mortgage. The lower monthly
payment can also provide a greater sense of security
in the event your future earning power might decrease.
Furthermore, with a little bit of financial discipline,
there are a variety of methods that can help you pay
off a 30-year loan faster with only a moderately higher
monthly payment. One such choice is the biweekly mortgage
payment plan, which is now offered by many lenders
for both new and existing loans.
Biweekly
mortgages
As the name implies, biweekly mortgage payments are
made every two weeks instead of once a month--which
over a year works out to the equivalent of making
one extra monthly payment (compared to a traditional
payment plan). One extra payment a year may not sound
like much, but it can really add up over time. In
fact, switching from a traditional payment plan to
a biweekly mortgage can actually shorten the term
of a 30-year loan by several years and save you thousands
in interest.
If you're interested in a biweekly payment plan, make
sure to check with your lender. In many cases, lenders
also offer direct payment services that automatically
withdraw funds from your bank account, saving you
the trouble of having to write and mail a check every
two weeks.
Making
extra payments yourself--do it early!
Another way to pay off your loan more quickly is to
simply include extra funds with your monthly payment.
Most lenders will allow you to make extra payments
towards the principal balance of your loan without
penalty. This is especially attractive to homebuyers
who are concerned about their future earning power,
but still want to be aggressive about paying off their
loan.
For example, if you had a 30-year loan, you might
decide to send the equivalent of one or two extra
payments a year (which could shorten the overall length
of the loan by many years). But if your financial
situation suddenly took a turn for the worse, you
could always fall back on the regular monthly payment.
One important note, though, is that if you do decide
to send extra funds, make sure to do it EARLY in the
life of the loan. This is because most home loans
are calculated in such a way that the first few years
of payments are almost entirely interest, while the
last few years are mostly applied towards the principal
balance. Thus, you can get the most bang for your
buck by making the extra payments early in the life
of the loan.
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