If you obtain a $300,000 loan at 4.5% interest for 30 years, in addition to the $300,000 you have to repay, you'll also pay an additional $247,000 in mortgage interest!
This doesn't usually feel too bad because to accomplish all of this, you'll only be paying about $1,520 per month for principal and interest.
The first year of the mortgage, you pay only $4,840 in principal but also pay $13,400 in interest! By year 30, almost your entire payment goes toward principal and only $437.00 for the entire year is paid in interest.
You've heard how compounding interest can make you rich as the bank pays you interest on interest. Well in a mortgage loan, that powerful principal works against you if you let it.
For example, you're told on most mortgages, your payment is due on the first of the month and delinquent on the 16th right? So many people pay somewhere between those two dates thinking they're keeping their loan current. But after the first of the month, you're actually paying interest upon interest to your disadvantage. If you continue to pay your loan payment AFTER the first of the month, your setting your loan up so it won't be finished in 30 years, it may take more payments or you'll owe a lump sum at the end. Remember, interest is charged DAILY. Every day you go past the first of the month, it costs you extra. So if you can, set up your life so that your monthly payment arrives at the lender before the first to save additional interest charges. Also don't fall for the offer to skip a payment made by some lenders. While this offer may assist you during a cash crunch (Note they usually offer this option toward the end of the year) that missed payment may cost you almost twice as much in the long run.
Also, most mortgages are simple interest loans (it's really not so simple, is it?). To see how this works, enter your loan information on a web site that will give you an amortization chart for your loan. Note that around year 15 you're paying about one half to principal and one half of your payment goes toward interest. That means the first half of the loan is the most expensive for the borrower. Since most people don't live in their house more than 10 years, lenders then get the opportunity to start all over again with a new buyer using the early more interest heavy payments. Now you know why so many people are begging you to set up your mortgage with them.
Since there usually are no penalties for paying a mortgage off sooner than 30 years, you can now use simple interest to your advantage. If it costs you $247,000 in mortgage interest in the above $300,000 example loan over 30 years, you may be surprised to learn that at the same interest rate, it will only cost you $113,000 in interest if you pay your loan over 15 years. That's a SAVINGS of approximately $134,000 in interest. Imagine what you could do with an additional $134,000 in your bank account! Think of the upgrades you can make on your house. And imagine the financial freedom you'll enjoy living in a paid-off house. To pay off your home in 15 years vs. 30, you have to step up your payments from $1,520 per month for a 30 year loan to $2,295 per month, an increase of $775 per month, or an extra $26.00 per day.
Too much money per month? Pay off your loan in 20 years, at about $1,898 per month and still save a hefty $91,500 in interest.
If your income isn't the same every month, when things are tight, make the minimum payment on time. When you have extra money, send it in to your lender, and make sure they credit the extra money to principal, and not toward your next payment. Your payment coupon may have an option for telling them what to do with the extra money you send.
If you cannot qualify for a 15 year mortgage, accept their offer of a 30 year loan, YOU turn it into a 15 year loan by the way your make your payments.
I have known people who take every extra cent they have and pay off their loan in maybe 10 years. Then they go and buy another house and do it all over again. Over the course of their life, they accumulate several free and clear homes.
Or, pay it down to about 50% of the value of the house, then rent it out and use the rental income to pay off the rest of the loan. Then buy another home and do it all over again. This way you may accumulate even more houses over your lifetime. Just don't get so burdened with debt that you'll lose everything in a downturn.
However you decide to create your future, don't let the costs of a mortgage get in the way of developing your wealth.
For more information, contact REALTOR(r) David Jurewicz (00661096) of RE/MAX Gold at 916.682.6454.