Only $72,914.09 of that amount goes directly toward interest. Using the same $300,000 figure for 15 years, a 3 percent interest rate would lead to total payments in the amount of $372,914.09. Such a discount saves you even more money. In reality, an interest rate as much as 50 percent cheaper is a distinct possibility. In the prior calculations, the presumption was made that the interest rates were identical. The rest of the reduction in total interest paid is due to the higher percentage going to equity plus the lessening of compound interest. That aspect alone cuts the overall interest payment in half. You are only paying interest for 15 years rather than 30. In addition, there is a common sense aspect. So, the underlying interest charges are less impacting. With a 15-year mortgage loan, you are paying more money each month, but a large portion of that payment goes directly toward the principal. Unless you pay more than the required monthly payment, you do not make significant progress toward neutralizing the balance of your loan. One of the unheralded aspects of a 30-year mortgage is that the first decade of your mortgage payments largely goes toward paying the interest rather than the principal. You are probably wondering how this is possible. In the example above, the difference would be $2,294.98 monthly for a 15-year loan as opposed to $1,520.06 for a 30-year loan. The only catch is that you will have a larger monthly payment for a 15-year mortgage. The total interest paid is reduced to $113,096.38 while the overall payment over the duration of the loan is $413,096.38. Refinancing to a 15-year mortgage will not negate your interest payments completely, but it will basically cut them in half.Ĭonsider the same $300,000 mortgage at 4.5 percent interest but for 15 years. After all, that is basically a second house worth of money. You obviously would prefer to pay less than $247,220.13 over the course of your loan. In other words, the loan you believe costs $300,000 is in actuality almost twice that amount. So, almost a quarter of a million dollars is directed toward paying the interest. If you are the borrower for a $300,000 30-year mortgage at 4.5 percent interest, you will pay $547,220.13 over the course of the line. That line may sound like a sales pitch, but it's true. You Will Save Hundreds of Thousands of Dollars With rates hovering near historic lows, now is the perfect time to consider refinancing to a 15-year loan. So, you are probably a long way from making your last payment. The problem is that if you are like most people, you have a 30-year conventional loan. In order to truly experience the pride of home ownership, you must pay off the loan. If you ever stopped making your payments, the bank would take it back from you. If you are still paying your mortgage, however, you do not truly own your home. Owning your own home is a liberating feeling. 4 Ways a Shorter Term Saves on Your Mortgage
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