Benefits of a Shorter Mortgage Loan Period
Save Thousands of Dollars in Interest by Paying Off Mortgage Faster
May 19, 2009
Longer amortization periods may seem very attractive to the typical home buyer in that the monthly payments are smaller, and therefore easier to pay. Lenders prefer long-term mortgages because they make more money off them.
Buying With Too Much Credit Will Increase Debt
Nowadays, consumers tend to spend far beyond their means. They max out their credit in order to have more material items, such as houses. Longer amortization periods may assist in this process by dragging out the payment terms, thus reducing monthly payments. A major consequence to this is the astronomical amounts of money spent in interest in order to sustain this longer mortgage period.
How Much Money Can Be Saved With Shorter Mortgage Period
Generally, the interest rate on a shorter term mortgage tends to be better than that of a longer term mortgage, which should help when trying to decide to refinance. For simple comparison purposes, however, the following example will use the same rate of 4.5% to show how much money can actually be saved with shorter loans as compared to longer loans:
Loan amount: $150,000; fixed interest rate: 4.5%
10 year mortgage loan:
- monthly payments: $1,551.57
- Interest paid at the end of 5 years: $26,403.84
- Interest paid at the end of 10 years: $36,188.21
15 year mortgage loan:
- monthly payments: $1,144.31
- Interest paid at the end of 5 years: $29,285.02
- Interest paid at the end of 15 years: $55,973.79
25 year mortgage loan:
- monthly payments: $830.21
- Interest paid at the end of 5 years: $31,507.14
- Interest paid at the end of 25 years: $99,062.69
40 year mortgage loan:
- monthly payments: $670.34
- Interest paid at the end of 5 years: $32,638.15
- Interest paid at the end of 40 years: $171,758.93
It is evident that substantial amounts of savings can be realized by refinancing a mortgage term to a shorter loan period. For example, savings of $115,785.14 can be attained at the end of a 15 year loan period as compared to the 40 year loan period. The monthly payments are about 1.5 times more with the 15 year loan period as compared to the 40 year loan period, but the savings are more than three times with the shorter period. Even knocking five years off of a loan can save incredible amounts of money.
Paying Mortgage Down Quicker Will Build More Equity
Building home equity faster is another advantage to shortening a mortgage loan period. By putting less money towards interest and more money towards principal, the home will be paid off faster, and thus free the homeowner from their mortgage.
It would be ideal to refinance at this time when interest rates are very low. For those who can financially handle slightly higher monthly payments, a shorter mortgage loan is where the largest long-term savings are acquired.
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