In the past, the 30-year fixed-rate mortgage was the standard choice for
most homebuyers. Today, lenders offer a wide array of real estate 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 real estate 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 real estate 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, 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. |