In an effort to make their monthly mortgage payment a lower amount, many people look at getting a loan with a longer payback period. While this will probably make for a lower monthly payment, is it really enough to make the longer term a good idea?
Let's look at an example to see how much a longer mortgage term will save per month and how much more it will end up costing over the term of the loan.
In our example, the Smiths are going to borrow $100,000 at 5% interest for 30 years to purchase their dream home on the North Shore. This would give them a monthly payment of $536.
To borrow that same $100,000, again at 5%, but for 40 years, the monthly mortgage payment would be $482, a savings of $54 per month. Over the whole 40 years, however, this loan would end up costing a grand total of $38,400 more than the total of the 30-year payoff.
Another problem that the Smiths will encounter in extending the loan out to 40 years, is that the interest rate will probably not remain at the lower percentage rate of the 30-year loan but will escalate to a higher interest rate making the cost of the 40-year loan even bigger.
One good thing about a 40-year loan is that extra mortgage payments can be made to pay the loan off more quickly, thereby incurring less in interest payments.
Let the Marla Schneider Team help you with learning about the right mortgage for your circumstances when you decide to buy in Wilmette, Glenview, Northbrook or the North Shore.
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