The amount you pay for your
mortgage
depends
on the
principal,
or the amount you borrow, the
interest
rate,
and the
term,
or length of time you take to repay.
Even
minor differences in the interest rate can have a major effect
on the cost of the mortgage. For example, if you borrow $100,000
for 30 years at 8.5% interest, your total repayment will be around
$277,000, more than two and a half times the original loan. But
at an 8% rate — half of a percent lower — the total
repaid amount would be $264,240. That’s almost $13,000 less,
or the equivalent of 16 fewer payments, than at the 8.5% rate.
Reducing
the term of a mortgage can also reduce the cost. For example,
a 15-year mortgage, as opposed to a 30-year mortgage of $100,000,
can cut your costs by over 60%. You’d save almost $100,000
— the same amount you originally borrowed — in interest.
With a shorter term, your monthly payments will be somewhat larger,
but you’ll always pay less interest overall. You may also
find that your lender will offer you a lower interest rate if
you choose a shorter term, reducing your costs even more.
What causes rates to change?
When the economy slows and
consumer confidence levels drop, housing rates fall.
Conversely, mortgage rates rise when home sales increase,
the economy grows stronger, and people feel more comfortable
spending money.
Even
minor differences in the interest rate can have a major effect
on the cost of the mortgage. For example, if you borrow $100,000
for 30 years at 8.5% interest, your total repayment will be around
$277,000, more than two and a half times the original loan. But
at an 8% rate — half of a percent lower — the total
repaid amount would be $264,240. That’s almost $13,000 less,
or the equivalent of 16 fewer payments, than at the 8.5% rate.
Reducing
the term of a mortgage can also reduce the cost. For example,
a 15-year mortgage, as opposed to a 30-year mortgage of $100,000,
can cut your costs by over 60%. You’d save almost $100,000
— the same amount you originally borrowed — in interest.
With a shorter term, your monthly payments will be somewhat larger,
but you’ll always pay less interest overall. You may also
find that your lender will offer you a lower interest rate if
you choose a shorter term, reducing your costs even more.