Ever asked yourself why the mortgage loans duration is always fixed? You don’t see a loan for 22 years and 7 months. Instead, you can get a fixed 15-year at more favorable interest rates than the 30-year mortgages. That’s the lifespan you are bounded to. What should you do? 15-year feels a little overachieving at this point of life, but 30-years loan will feel like a never ending catholic wedding that eats out your salary. Let’s not forget, the longer the lifetime of a mortgage is, the more likely you are to pay off more in interest rate. The lender wants his money back as fast as possible, or else he will compensate himself with better terms. So what can you do when it comes to a long term mortgage?
Balance it out. Volunteer to pay extra every month and shorten the lifespan of your mortgage. That basically means you are prepaying your loan. In case you haven’t noticed, the term we were using was volunteering, and it’s priceless. You are not legally obligated to pay more – no one gets hurt if you need to reduce your prepayment or even waive it from time to time.
You can also consider some bigger lump sum payments that are likely to have the similar effect on your overall expanse. Assuming you can afford prepayments, even a small amount of extra cash per month can save you a lot of money. Let’s say you are committed to a $400K mortgage on a 4.5% fixed rate for 30 years. By paying as little as additional 75$ a month, you will pay off your mortgage in only 28 years and save over $27,000.
A second cousin of prepayment is biweekly mortgages. You don’t pay once a month, but once every two weeks. In this scenario the lender gets his money a little bit sooner, and reduce the amount spent on interest rate. You might end up paying a little bit more every month, yet it can be to an immense help. Let’s compare those two options, on repaying a $100K loan in a 4% fixed rate.
30-years monthly payments:
- Every month you will repay $477.
- Total cost of the mortgage would be $171,870.
Little less than 26-years in a bi-weekly plan:
- Two biweekly payments each month for $238.5, approximately $517 a month.
- Total cost of the mortgage would be $160,591.
Overall you can save over $11,276 in interest, more than 10% of the loan !
But please, do us a favor. Never do any of this in the price of your initial commitment to the lender. First of all make sure you can repay what you are and will be obligated to, and only then think of prepayments. Don’t forget, being unable to repay a loan can hit you hard. Still, if you can open up your pocket every month, just a little bit more, you can play your cards right.