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Mortgage Term
In addition to the standard 15 year and 30 year mortgage loan terms, there are more 40 and 50 year mortgage loans popping up. In an effort to lower their monthly payment in a market that has seen rising housing costs, people are signing up for these 40 and 50 year mortgages that don´t make any financial sense. Even more startling is the fact that the short term benefit of signing one of these loans is something of only a few dollars.
The disadvantages to using 40 and 50 year mortgage loans are so many that it´s difficult to fathom anyone actually biting on the offer after being educated on the facts. A quick use of the mortgage calculator will show that these loans do, in fact, reduce your monthly payment by a few dollars each month. That´s not the point, though. Your home is ultimately your most important investment and should serve as a financial building block for the future. With extra long mortgage loans, you are paying way too much money to the bank.
The 40 and 50 Year Mortgage Don't Add Up
Over a 40 or 50 year loan term, you will be paying much more money to the lender than you should. This is because they have to charge high interest rates on those longer loans. The 40 year mortgage loans are risky for lenders, so you´re likely to get an interest rate that is way over the top of even the 30 year loan. Over those extra ten years, you will be paying much of your potential home equity to the bank in the form of interest.
For example, if you were to borrow $100,000 on a 30 year mortgage term at a mortgage rate of 6.75%, you would pay around $650 per month and a total of $133,450 in interest over the course of the loan. That same $100,000 borrowed at 7% over 40 years, would cost you almost $65,000 more in interest over the term of the loan. How much would you save on the monthly payment? Only around thirty dollars, if you are lucky. Is it really worth the extra interest to save a few dollars every month?
Long Term Mortgages Make It Tough To Build Equity
Home equity built through a standard home mortgage is one of the most important pieces to your financial future. It can be used as a catalyst for a successful future, a healthy retirement, or even to send your kids to college. Signing a 40 or 50 year mortgage loan doesn´t make any sense because it ties your money up at a high interest rate for far too long. Not only will the bank be reaping the rewards of your interest payments, but you will also be tied to making payments until you are into retirement. Who really wants to be paying 7% interest on their first home when they are 70 years old?
With affordable rates on shorter termed loans, there is no reason to jump on a long term loan. Though saving a few bucks every month might sound good at the beginning, it can be a potentially crippling decision in the long term.
The 15 and 30 Year Mortgage
For many consumers, a 15 year mortgage loan term can make a lot of sense. The advantages to undertaking this type of commitment are many, while there are only a few drawbacks. Before jumping head first into a 15 year mortgage loan, there are a few questions that one must consider, though. Buying a home is a huge investment, so a little bit of self evaluation can help move the process forward.
When compared to a 30 year mortgage, 15 year mortgages offer a much lower interest rate. This, in turn, will reduce the amount of total interest that you owe when paying off the loan. Using a mortgage calculator , you should be able to quickly and correctly determine how much money you´ll save by going with the 15 year mortgage as opposed to the 30 year variety. Is that decrease in interest payments enough to make up for the substantially larger monthly payment that you will be required to pay under the 15 year plan?
The Short Term Loan Requires Discipline
Though you might think that you have the discipline to make extra payments on a 30 year mortgage, it can be difficult to maintain that plan. When money gets tight, are you going to have the discipline to make the sacrifices to afford those extra payments? A 15 year mortgage loan gives you a set payment amount that will have to be paid every month. This provides great incentive to consider this quick track loan.
A large amount of home equity is like having a blank check in your back pocket. In the case of emergencies or some huge expense, borrowing against the equity in your home is the most effective way to take debt. If you have some large expenses coming up, such as a home renovation or college tuition, then it could make a great deal of sense to build up that equity sooner. If you are one for investing, then a large amount of quickly built equity can be a source of cash for other ventures.
Regardless of your current age, you probably have some sort of timetable for when you´d like to be done with all of your mortgage loans. Is there some sort of incentive to get rid of this loan sooner rather than later? If you are an older person, do you want to be able to enjoy the leisure of retirement without having to worry about a mortgage payment every month? There are plenty of reasons why one would want to shed a home loan quicker rather than later. It is important to consider the income tax implications, as well.
The 15 year mortgage requires a substantial amount of money for each monthly payment. This, in turn, can take money away from other types of investments. Are you comfortable with having a large amount of your income tied up in real estate? On the flip side, you need to consider how well diversified your portfolio is in order to have a balanced investment plan.