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Types of Loans
15
–Year?
30 –Year?
Biweekly Mortgage?
In the past, the
30-year, fixed-rate mortgage was the standard choice for most homebuyers.
Today, however, lenders offer a wide array of loan types in varying
lengths--including 15, 20, 30 and even 40-year mortgages.
Deciding what length
is best for you should be based on several factors including: your
purchasing power, your anticipated future income and how disciplined you
want to be about paying off the mortgage.
What
are the benefits of a shorter loan term?
Some
homeowners choose fixed-rate loans that are less than 30 years in order to
save money by paying less interest over the life of the loan. For example,
a $100,000 loan at 8 percent interest comes with a monthly payment of
around $734 (excluding taxes and homeowner's insurance). Over 30 years,
this adds up to $264,240. In other words, over the life of the loan you
would pay a whopping $164,240 just in interest.
With a 15-year loan,
however, the monthly payments on the same loan would be approximately
$956--for a total of $172,080. The monthly payments are more than $200
more than they would be for a 30-year mortgage, but over the life of the
loan you would save more than $92,000.
What
are the advantages to a 30-year loan?
Despite the interest savings of a 15-year loan, they're not for everyone.
For one thing, the higher monthly payment might not allow some homeowners
to qualify for a house they could otherwise afford with the lower payments
of a 30-year mortgage. The lower monthly payment can also provide a
greater sense of security in the event your future earning power might
decrease.
Furthermore, with a
little bit of financial discipline, there are a variety of methods that
can help you pay off a 30-year loan faster with only a moderately higher
monthly payment. One such choice is the biweekly mortgage payment plan,
which is now offered by many lenders for both new and existing loans.
Biweekly
mortgages
As the name implies, biweekly mortgage payments are made every two weeks
instead of once a month--which over a year works out to the equivalent of
making one extra monthly payment (compared to a traditional payment plan).
One extra payment a year may not sound like much, but it can really add up
over time. In fact, switching from a traditional payment plan to a
biweekly mortgage can actually shorten the term of a 30-year loan by
several years and save you thousands in interest.
If you're interested
in a biweekly payment plan, make sure to check with your lender. In many
cases, lenders also offer direct payment services that automatically
withdraw funds from your bank account, saving you the trouble of having to
write and mail a check every two weeks.
Making
extra payments yourself--do it early!
Another way to pay off your loan more quickly is to simply include extra
funds with your monthly payment. Most lenders will allow you to make extra
payments towards the principal balance of your loan without penalty. This
is especially attractive to homebuyers who are concerned about their
future earning power, but still want to be aggressive about paying off
their loan.
For example, if you
had a 30-year loan, you might decide to send the equivalent of one or two
extra payments a year (which could shorten the overall length of the loan
by many years). But if your financial situation suddenly took a turn for
the worse, you could always fall back on the regular monthly payment.
One important note,
though, is that if you do decide to send extra funds, make sure to do it
EARLY in the life of the loan. This is because most home loans are
calculated in such a way that the first few years of payments are almost
entirely interest, while the last few years are mostly applied towards the
principal balance. Thus, you can get the most bang for your buck by making
the extra payments early in the life of the loan.
This information is
deemed accurate BUT not guaranteed. For additional information check my
website regularly as information is constantly being updated and added.
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