Getting a home loan is almost a necessity today. People buying a home will often opt for the popular 30-year fixed rate mortgage. And with the emergence of 40 and 50-year home loans in the past five years, the idea of borrowing for just 15 years is becoming an old and forgotten concept.
Two matters that should be considered when deciding what type of loan to get is how much will be paid each month, and how much will be paid in interest over the lifetime of the loan.
40-year Mortgage Costs
When people buy a home, especially a first home, buying something that is slightly out of reach by extending the life of the loan can seem attractive.
Mortgage brokers typically base how much home can be purchased by rates on 30-year programs, so taking on a 40-year loan may present borrowers with the appearance that they'll be able to get more for their money.
If a $150,000 loan was taken out at 7% over 40 years, the loan would cost $932 every month in principal and interest and a little more than $447,000 over 40 years, or three times the amount borrowed. The same loan taken out over 30 years would cost $998 each month and $359,000 over 30 years.
The monthly benefit of the 40-year plan is a savings of $66, but the long term loss is $88,000 that will be paid in interest, not to mention the 10 years that could have been spent not paying a mortgage at all.
The total of the subsequent 10 years of payments amounts to more than $111,000! This money would be better off being used to pay for monthly living expenses, brand new luxury automobiles, or 10 trips to foreign countries than to settle up with a creditor.
15-year Mortgage Savings
When first time home buyers investigate 15-year mortgage products, the numbers can seem daunting since lenders approve buyers based upon the affordability of payments over 30 years.
Purchasing the same house with a $150,000 mortgage at a fixed rate of 7% over 15 years would bring a significant rise to the monthly principal and interest payments, locking them in at $1,348, which is $350 more every month than payments made over 30 years.
While the monthly payments may seem high, the value through savings is worth it. The total cost of the loan over 15 years would be less than $243,000, or $116,000 less than a 30-year plan and $204,000 less than a 40-year plan.
Purchasing a home with a 15-year mortgage may cost more each month, but it is much cheaper long term. Extended borrowing plans leads to little savings on monthly payments and huge interest payments in the end, making the 15-year home loan a very attractive product.
 |
 |
 |
