Buying your home is one of the largest investments you will ever make. It costs a lot of money to buy a home, and even more if you have a mortgage. But there are ways to limit how much a mortgage will cost you. 1. Fifteen-year mortgages are your best buy Fixed-rate mortgages are your safest bet when taking out a mortgage. With a fixed interest rate, you will always know what your monthly payment will be. There are no surprises down the road. Your payment will not change. If interest rates drop significantly, you can refinance to a lower rate mortgage if having a lower rate makes up for the closing costs and extension of the loan term. But with an adjustable rate, you take the risk that rates will go up and your payments will increase. Most consumers still take out the traditional 30-year mortgage. It seems fairly affordable and is what most banks right off the bat when it comes to fixed rates. Let's look at how the numbers break down: $250,000 mortgage at 7% for 30 years = $1,663 monthly payment Total interest you pay over 30 years = $348,772 Total amount paid = $598,772 (interest plus principal) $250,000 mortgage at 7% for 15 years = $2,247 monthly payment ($584/month more) Total interest you pay over 15 years = $154,473 Interest savings on a 15-year versus 30-year mortgage = $194,299 When it comes to the long term costs of your mortgage, the 15-year mortgage is the best buy. But for many homeowners just starting out, the almost $600 difference can be a lot when it comes to making ends meet. You have several options. You can choose a less expensive home and consider moving up when you can afford it, in around 10 years. You could do the in-between and ask for a 20-year mortgage, which doesn't save as much, but every little bit counts. Or you could take out the 30-year mortgage and make extra payments to it with every bit of extra money you have. Personally, we have a 20-year mortgage but we are paying it off like a 12-year. We've never missed our goal of putting extra money to the payment, but we know if things get tight, we have a low enough payment to scrape by if necessary. 2. Putting extra money towards your principal Putting extra money towards your principal with every payment you make is a wise decision. Even if it is only $100 extra, you are saving a lot of money in the long run. Plus, you will own your property much sooner. Let's look at the numbers: $250,000 mortgage at 7% for 30 years = $1,663 monthly payment
$100 extra per month reduces mortgage term by almost five years
Total interest you pay over 30 years = $291,992
Total amount paid = $541,992 (interest plus principal) Interest savings on a 30-year mortgage with a $100 per month additional principal payment = $56,780 3. Borrow less and payback less Okay, that makes a lot of sense. If you are able to put more down on your mortgage, you will save a lot in the long run. I know it is hard to save for a downpayment, but it is worth it. I believe that if you are really frugal, you can save a substantial amount of money for the things that you really want. Or you could just buy a less expensive property. If you did that and saved the difference, by the time you have the mortgage paid off, you would have quite a nest egg saved up. Let's look at the numbers: $150,000 mortgage at 7% for 30 years = $997 monthly payment Total amount paid - $358,920 (interest plus principal) $250,000 mortgage at 7% for 30 years = $1,663 monthly payment Total amount paid - $598,680 (interest plus principal) You save $239,750 by having $100,000 less in a mortgage. When you look at buying a home, look at not only the monthly payment, but at the total cost of the mortgage. There are ways to cut how much your mortgage costs you over the years. Think of how much you can save and invest in other ways. |
