Fixed Rate 25 Year
In order to get lower monthly payments, most people take out mortgages for 30 years. This is the industry standard. But you can achieve substantial savings by shaving just 5 years off your loan.
The total amount you pay for your home is determined by price you pay to the seller and by what you pay the mortgage company. With a 30-year loan, you actually pay more to the mortgage company than you do to the seller.
Say you found the home of your dreams for $300,000 and you had $50,000 to put as down payment. Assuming that you can pay all your closing costs up front, your mortgage amount is $250,000.
To finance that $250,000 you get an interest rate of 7%. Just to make things simple, lets assume that lender will give you the same rate for a 30-year loan and a 25-year loan. Most of us look at the monthly payment as the bottom line and in that case, the 30 year loan seems to be the most affordable. The monthly payment on the 30 year loan would be $1663.26 but the payment on the 25 year loan would be $1766.95.
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But there is another way to look at the cost of your loan. If you look at the total amount of interest your pay over the life of the loan, the picture is much different. By the time you pay off your 30-year loan, you’ll have paid $348,772 in interest but at the end of the 25-year loan the bill for interest is $280,084. And you own your home 5 years sooner with the shorter loan.
Not all lenders are the same. It pays to know as much as possible before you walk in the door of a lending institution. No matter what the advertisements say, the job of the loan officer is to make money for the company, not to find the perfect loan for you. Investing some time into researching all your options can pay off over the long run.
There are many web sites that offer free mortgage calculators. You can plug in different numbers and see how it affects your monthly payments and overall loan cost.
Before you commit to a lender, take the time to read through all the conditions of the loan. When you are ready to close on your loan, there shouldn’t be any surprises waiting in the fine print.
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