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.
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.
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.
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.
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.
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
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.
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
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.
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.