How Long Your
Mortgage Runs Determines How Much You Pay
by: W. Troy Swezey
The first thing most of us think about when the time
comes to take out a mortgage on a new home is the
interest rate.
Thats both perfectly natural and very sensible.
The rate of interest we pay can make an immense
difference a difference amounting to tens of
thousands of dollars in what the actual cost of our
house ultimately turns out to be.
Still, interest rates are far from the only thing
worth thinking about where mortgages are concerned.
Other important variables need to be considered too. One
is the question of whether to take a fixed interest rate
of choose from among the many kinds of variable-rate
mortgages that have been created over the years to meet
the differing needs of different buyers.
Another and a very important one is the
rather basic question of how long you want your mortgage
to run. Even with fixed-rate mortgages, a broad spectrum
of time spans is commonly available. In most cases the
extremes are 15 years on the short side, 30 years on the
long.
Some years ago, when a famous scientist was asked to
name the most powerful force in the universe, he
answered the power of compound interest. This
reply suggests that he was knowledgeable not only about
the laws of nature but the principles of finance
about what happens to even a modest sum of money when it
continues to accumulate interest year after year after
year.
Even at a modest rate of interest, money in a savings
account can double within ten years or less. The amount
actually paid for a house with a $100,000 mortgage can
turn out to be several hundred thousand dollars if the
mortgage runs for 30 years.
When you opt for a mortgage of only 15 or 20 yeas, on
the other hand, you chop off much of the growth in your
total obligation. But to do that without reducing the
initial size of your mortgage, you have to make a bigger
payment every month. As in most of lifes major
decisions, the stakes are high and the trade-offs
require careful consideration. Above all, they require a
careful examination of your resources, your aspirations,
and your personal priorities.
Someone whos willing to make near-term lifestyle
sacrifices for the sake of long-term gains probably will
prefer a shorter mortgage. If your motto is eat,
drink and be merry, on the other hand, the idea of
squeezing extra money out of your budget for the sake of
a bigger house payment wont have much appeal.
If youre attracted by a shorter, faster mortgage
and think you might be able to handle one, ask your real
estate agent to show you just how much long-term savings
such an approach can make possible. Chances are youll
be astonished by the size of the number.
Remember, though, that a 15-year or 20-year mortgage,
by increasing your monthly obligations now and for years
to come, can sharply reduce your flexibility.
One good approach is to take a 30-year mortgage but
try to discipline yourself to make one extra monthly
payment each year. If you can stick to such a regimen,
ultimately it will yield the benefits of a 15-year
mortgage. Meanwhile, youll be less strapped if
changing circumstances reduce your ability to make
monthly payments.
Whats really important is making yourself aware of
how many different options you have and gathering
detailed information about the ones that interest you
most. A good real estate broker can be your key to all
the information you could possibly need.
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