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.
That’s 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 life’s
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 who’s 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 won’t have much appeal.
If you’re 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 you’ll 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, you’ll be less strapped if changing
circumstances reduce your ability to make monthly payments.
What’s 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.
Mortgage
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