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Mortgage truth: Time equals money
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Has anyone ever told you that "time is money"? Well in the world of lending this is especially true. The longer you have the loan the more you are going to pay in the form of interest. If you have a $100,000 loan for 30 years at 5% interest you will have paid $93,256.52 in interest over 30 years (assuming you keep it for that long).
On the other hand, if you get the loan for 15 years at 5% you would pay $42,343.24 in interest over 15 years. Not only is the total interest paid less than a 30 year loan but the interest paid is less than half of the 30 year loan.
So, as you can see, time is money.
BUT!
There is a big but in your way...all is not that simple in real life. Because the bank would prefer you to take a 15 year loan they will give an added incentive by offering you a lower interest rate if you take the 15 year rather than the 30 year loan. So now you are paying over a 15 year period at an interest rate of let's say 4.25%. Now you will only pay $35,410.03 in interest over the life of the loan and you will own the home after only 15 years.
BUT!
There is another big but in your way...the payment is higher on the 15 year loan even with a lower interest rate. Quite a bit higher as a matter of fact. At 4.25% on a 15 year loan your payments would be (principal and interest) $752.79/mo. On a 30 year loan at 5% interest your payment would be (principal and interest) $536.82/mo. For the 15 year loan that's 40.23% more than the 30 year payment.
Some people would say that this is not that big of a deal, they would just pay the higher payment. One big question in the room is how do you know you will work steady throughout the entire 15 years? What if there is a recession and you get laid off? What if you get sick and can't work for an extended period of time? What if you belong to a union and you go on strike for an extended period of time? There a lot of reasons why you might be struggling at one time or another.
What you might consider is to take the 30 year loan and pay more each month and pay it off early if you don't have any difficulties in employment. This way you can pay more as long as your are financially able and if you have tough times you can pay the regular monthly payment. (generally you must write a
separate check and write on it that it is to go towards the principal)
There is also another way you can solve this dilemma; often banks have plans that will allow you to make half the payment at two different times during the month. Depending on the plan you could have your loan paid off significantly sooner than you would otherwise. On your own you cannot just pay twice a month and expect to get the same results. You will need to enroll in a bank plan. Since these plans are not free you should do your homework before committing.
Here are some links to websites with more in-depth info.
http://www.bankrate.com/brm/news/mtg/20010920a.asp
http://homebuying.about.com/cs/mortgagearticles/a/biweekly_plan.htm
http://www.fivecentnickel.com/2008/04/22/are-bi-weekly-mortgage-payment-programs-a-scam/
http://www.mymoneyblog.com/archives/2008/09/biweekly-mortgage-payment-plan-bisaver-vs-do-it-yourself.html
If you are a first-time home buyer be sure to check out the book First-time Home Buying in a Nutshell. You can buy it through the companion website www.thenutshellbook.com on Amazon.com.
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