With the plethora of mortgage terms available today, including terms of 40, even 50 years, how do you compare the overall cost of one mortgage versus another? It's actually pretty simple - but before you do, you need to assess what the expectancy of the mortgage life is. In other words, how long do you plan on keeping the loan. For the purpose of demonstration, I'll use a 5 year term as that is about the average today.
Let's compare a 30 year fixed with a 40 year fixed, and assume that the loan amount, closing costs, etc., are all the same. The only variable will be the interest rate, as you will pay a higher rate for the longer term. The following chart illustrates the comparison:
| Terms | 30 Year | 40 Year |
| Loan Amount | $300,000.00 | $300,000.00 |
| Interest Rate | 6.50% | 6.75% |
| P&I | $1,896.24 | $1,810.07 |
| Total of Payments | $113,772.24 | $108,604.23 |
| Remaining Balance | $280,832.93 | $291,281.37 |
| Equity | $19,167.07 | $8,712.63 |
| Total Cost | $94,555.17 | $99,891.60 |
As you can see, the total cost of the 30 year option is over $5300 less than the 40 year option. If the $86 per month savings was consumed rather than invested, the savings is over $10,400! Naturally, as the term lengthens, the cost savings of the shorter term increase when compared to the 40 year option.
To make this type of comparison yourself, you simply need a calculator, and an amortization chart. Start with the loan amount, and calculate the payment for each of your scenarios. Next, multiply the total payment by the expected term of the mortgage (in this example, the term was 60 months). This will give you your total of payments over the term. Next, calculate your remaining balance of each loan scenario at 60 months by referring to your amortization table. Subtract this amount from your beginning loan amount to derive your equity gained. Finally, subtract your equity gained from the total of payments, and you have your total cost!
This calculation tool can also help you to assess whether or not refinancing is a good idea - you can easily adapt this to compare a new mortgage with your present loan.
Of course, the easiest thing you can do is to simply call a mortgage consultant and have the calculations run for you. If you're shopping for a mortgage in Massachusetts or New Hampshire, I'd be glad to run your numbers for you! Just call me at (978) 853-7066, or drop me an email at doncarter@myallstarmortgage.com.
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