If you ask the average person about mortgages and mortgage terms, most people believe that there isn’t much room for borrower choice in the decision. The truth is that every mortgage applicant has numerous choices and decision in picking out the right mortgage loan. All too often people agree to whatever loan their lender offers without even negotiating or shopping around for a better loan. When it comes to choosing a mortgage term, flexing the power of decision could be a money saving strategy.
Locked In For Years
Although the average borrower accepts a 30 year mortgage term, this is by far the only option available. Most people end up in a 30 year mortgage in order to obtain the lowest monthly payment possible, but choosing a shorter mortgage term can be more beneficial in some situations.
For example, payments on a $200,000 loan, with 4% fixed interest rate, for a 20 year mortgage are around $955. The payment for the same loan on a 30 year mortgage is $1,212, a difference of only $257 a month! However, the amount of interest that will be paid on the 30 year mortgage is over $52,000! That means that an additional $52,000 will be paid towards the same loan simply for lowering monthly payments by $257 a month and taking an additional 10 years to pay off the mortgage.
While some people may forgo their chance at homeownership, or risk ending up in foreclosure, unless they accept the lower and longer payment terms there are ways to get around that. First, consider buying a cheaper home. Buying a more affordable home under a 20 year mortgage can keep payments low, but also build equity much faster and free up an additional 10 years of their life. Second, if a home is purchased under a 30 year loan, work to pay it off sooner. Just like other debt accounts paying only the minimum payment is required, but doesn’t mean that more can’t be paid towards the overall loan.