How Term Effects Payment and Rates (Example)

On May 15, 2012, in Buyers, by David Monsour

My namesake just so happens to be a mortgage lender.  I accidentally found him when googling myself to check on my site.  Today he posted something interesting that I thought I would share.  Before I show the example I want to explain a few basic principals.  Shorter terms (number of years)  generally offer lower rates.  The payment with a shorter term will generally be higher despite the lower rate however the amount of interest the borrower pays will be quite a bit lower over the length of the loan.  I know there is some technical jargon here so just to be clear shorter term also means the home will be paid off quicker if it isn’t refinanced before payoff.

Loan Amount        Rate           Term          Payment
$200,000.00         3.500%    10               $1,977.72 Fixed
$200,000.00         3.625%    15               $1,442.07 Fixed
$200,000.00         4.250%    25               $1,083.48 Fixed
$200,000.00         4.250%    30               $983.88 Fixed

I’m all for the flexibility of 30 year loans.  It gives you the option to pay the low payment but also contribute extra toward principal.  The typical mortgage requires paying 12 payments a year.  Making one additional payment per year, also known as bi-weekly, shortens the term from 30 years to 23 years.  I think for a younger borrowers stretching to 30 years with goals of paying the home off quicker is a great decision.  15 year and 10 year loans are a great products if the payment is very comfortable but if you’re living paycheck to paycheck or close you may want to create a lower monthly obligation.  It’s easy to add more to a payment but missing a payment or a partial payment could lead to foreclosure.

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