While a 30-year mortgage may appear to make sense to a lot of people on the surface, in reality it is often not the best option.
If you are buying a house, you will most likely need a mortgage loan to pay for a large percentage of the purchase. One of the main decisions to make when getting such a loan is deciding the preferable mortgage rates repayment time length.
If you get a 30-year mortgage, you will have lower monthly payments, but you will be paying a lot more interest than if you took a loan period of say 15 years.
The total interest you pay over the course of your mortgage will depend on the interest rate of the mortgage loan. The following example will showcase just how much interest you will be paying over the course of a 30-year mortgage loan compared to when you calculate a mortgage loan over 15 years.
A startling difference
This example looks to calculate a mortgage loan of 30 years with mortgage rates at a fixed 5% interest on a house that is worth $300,000. You pay 20% of the total price in cash right off the bat.
Therefore, you will need a mortgage loan of $240,000 to fund the purchase. Not including any insurance or property taxes to calculate mortgage rates, you will have to pay $1,288 each month.
You will normally get lower mortgage rates if you are looking at a much shorter time period. Assuming this is 4.5% for a 15-year mortgage loan, your monthly repayment will be $1,836. This represents an additional $548 each month.
While this may not seem like it is a massive difference, over the course of 30 years, you will have to pay a total of $463,680 for your $240,000 house mortgage loan. This compares to $330,480 for a 15-year mortgage loan. Therefore, you will be paying an extra $133,200 if you go for the 30-year option.
Other advantages to shorter terms
As well as having to pay significantly less interest on your mortgage loan when you go for a 15-year option rather than 30 years, there are a few other advantages associated with shorter terms.
You will be building up the equity in your home at a much faster rate, as more of your money will be going towards paying off the principal borrowing each month and not going into the bank’s pocket in the form of interest.
Paying off your house mortgage is also a very liberating experience as you no longer have to meet any payments and you completely own your house outright. People who have a lot of debt, whether it is student loans, credit card debt or a mortgage loan will know that the outstanding sum can be a weight on your shoulders.
If you successfully manage to pay off your house after 15 years compared to a 30-year term, you will be saving yourself from having the constant stress of continuing to have to make monthly repayments for another 15 years. You will also have a lot more extra money on a monthly basis to allocate to other areas of your finances.
Don’t get shortsighted
When it comes to finances or life in general, it can be easy to take a short term outlook. While poor food choices, lack of exercise and high levels of stress may not have a significant short term effect, subsequent issues will build up in the long run. The same goes for your financial well being, whether this is retirement planning, life insurance or paying off your mortgage loan.
While you will save a few hundred dollars every month when you go for a longer term mortgage, you will only be making short term gains. By taking a long term view, you will see how much money you can save through a 15-year mortgage as you won’t be padding your lender’s wallet with nearly as much interest. As soon as your house is paid off, you can then start to enjoy the fruits of your labor.
Getting good mortgage loan terms
If you are buying a house for the first time, it can be somewhat of an intimidating process to calculate the mortgage that is best for you. You are likely making the biggest purchase of your life, committing to spending hundreds of thousands of dollars in a lot of cases over an extended period of time. There are also a lot of nuances involved with the terms of a mortgage loan that can be confusing if you are not familiar with the world of finance.
This is why it is important that you are dealing with a reputable lender and you are fully aware of all of the terms and conditions of the loan. If you fail to read the fine print, understand certain terms and calculate mortgage rates incorrectly, you may be opening yourself up to trouble down the line.
Perhaps the best way to stack the odds in your favor of getting the best mortgage rates and terms as possible is preparing your finances in an attractive manner to the lender before applying for a loan.
This means actively raising your credit score, paying off as much existing debt as possible, avoiding making any large purchases and calculate a mortgage size that you can afford.
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Getting professional advice
The optimal strategy to getting the best mortgage loan rate is probably by seeking the advice of a professional. They can help you calculate mortgage needs and what type of loan is best-suited to your situation, as well as giving you an indication as to how much you can afford on a monthly basis.
Some people who already have a mortgage loan may want to make changes and professionals could potentially help them with this process. They might want to take some equity out of the house in order to finance renovations for example.
Others may seek to refinance the mortgage loan as they can get a better interest rate on the debt or they want to shorten/lengthen the time period of the loan. These can be tricky matters and most professionals could probably help you deal with the lender and get a good deal.
As you can see from this article, there are many advantages to getting a shorter-term mortgage. While you will be paying slightly more in the short term, you will probably save significant sums of money in the form of interest payments in the long run.
You should also be able to take the weight of the long-term debt off your shoulders at a much quicker rate. As soon as your mortgage loan is gone, you will be able to use your spare cash however you please.