The cost of a mortgage depends on the amount you borrow, the interest you pay, and how long you take to repay.
Since monthly payments spread the cost of a mortgage over a long period of time, it's easy to forget the total expense. For example, if you borrow $100,000 for 30 years at 6.5% interest, your total repayment will be around $227,545, more than two and a quarter times the original loan.
Minor differences in the interest rate — 6.5% vs. 6% — can add up to a lot of money over 30 years. At 6% the total repaid would be $215,842 about $11,703 less than at the 6.5% rate. Of course, many borrowers refinance or sell before the end of the loan term, so the differences between the rates are less dramatic.
CUTTING MORTGAGE EXPENSES
You can reduce your cost several ways.
- Consider a shorter mortgage. With a shorter term, you'll pay less interest overall, and your monthly payments will be somewhat larger. A 15-year mortgage, as opposed to 30-year mortgage for the same amount, can cut your total cost by more than 55%. Some banks offer 20-year or 25-year mortgages, which reduce the overall interest cost without significantly raising monthly payments. At the other end of the scale, some lenders are also offering 10-year loans, which can be affordable when the interest rate is low.
- Consider amortizing, or paying off, the loan faster. You can pay your mortgage bi-weekly instead of monthly, or you can make an additional payment each month.
With bi-weekly payments you make 26 regular payments instead of 12 every year. The mortgage is paid off more quickly, and you pay less interest. But you may have to pay higher fees to arrange and follow this payment schedule.
You can make an additional payment each month to reduce your principal. With a fixed-rate mortgage, you pay off the loan quicker, but regular monthly payments remain the same. With an adjustable-rate mortgage (ARM), interest is figured on a smaller principal each time the rate is adjusted, so your monthly payments could become lower.
Be sure the lender knows you want the extra payments credited toward the principal. Your mortgage bill should have a line for entering the additional amount, and you can send a separate check. When you pay extra, you can change the amount or stop at any time.
The catch to additional payments: You may come out ahead by investing your extra cash elsewhere, especially if you are taking a deduction for the mortgage interest. In the last years of a fixed-rate loan, you're paying off mostly principal so you can't reduce the interest cost by very much. But being done with mortgage payments may be appealing.
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