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By W. Troy
Swezey
The first thing most of us think about when the time comes to take out a
mortgage on a new home is the interest rate.
That’s both perfectly natural and very sensible. The rate of interest we pay
can make an immense difference – a difference amounting to tens of thousands
of dollars – in what the actual cost of our house ultimately turns out to be.
Still, interest rates are far from the only thing worth thinking about where
mortgages are concerned. Other important variables need to be considered too.
One is the question of whether to take a fixed interest rate of choose from
among the many kinds of variable-rate mortgages that have been created over
the years to meet the differing needs of different buyers.
Another – and a very important one – is the rather basic question of how long
you want your mortgage to run. Even with fixed-rate mortgages, a broad
spectrum of time spans is commonly available. In most cases the extremes are
15 years on the short side, 30 years on the long.
Some years ago, when a famous scientist was asked to name the most powerful
force in the universe, he answered “the power of compound interest.” This
reply suggests that he was knowledgeable not only about the laws of nature
but the principles of finance – about what happens to even a modest sum of
money when it continues to accumulate interest year after year after year.
Even at a modest rate of interest, money in a savings account can double
within ten years or less. The amount actually paid for a house with a
$100,000 mortgage can turn out to be several hundred thousand dollars if the
mortgage runs for 30 years.
When you opt for a mortgage of only 15 or 20 yeas, on the other hand, you chop
off much of the growth in your total obligation. But to do that without
reducing the initial size of your mortgage, you have to make a bigger payment
every month. As in most of life’s major decisions, the stakes are high and
the trade-offs require careful consideration. Above all, they require a
careful examination of your resources, your aspirations, and your personal
priorities.
Someone who’s willing to make near-term lifestyle sacrifices for the sake of
long-term gains probably will prefer a shorter mortgage. If your motto is
“eat, drink and be merry,” on the other hand, the idea of squeezing extra
money out of your budget for the sake of a bigger house payment won’t have
much appeal.
If you’re attracted by a shorter, faster mortgage and think you might be able
to handle one, ask your real estate agent to show you just how much long-term
savings such an approach can make possible. Chances are you’ll be astonished
by the size of the number.
Remember, though, that a 15-year or 20-year mortgage, by increasing your
monthly obligations now and for years to come, can sharply reduce your
flexibility.
One good approach is to take a 30-year mortgage but try to discipline yourself
to make one extra monthly payment each year. If you can stick to such a
regimen, ultimately it will yield the benefits of a 15-year mortgage.
Meanwhile, you’ll be less strapped if changing circumstances reduce your
ability to make monthly payments.
What’s really important is making yourself aware of how many different options
you have and gathering detailed information about the ones that interest you
most. A good real estate broker can be your key to all the information you
could possibly need.
W. Troy Swezey is the author of “HOW LONG YOUR MORTGAGE RUNS DETERMINES HOW
MUCH YOU PAY." As a Realtor at Century 21 Paul & Associates, he has helped
many individuals with their real estate needs. Visit his web site to download
his free e-book, “REAL ESTATE SECRETS EXPOSED.” http://www.TroyIsMyRealtor.
com (http://www.TroyIsMyRealtor.com) or mail to: TroyC21@usa.net
(mailto:TroyC21@usa.net)
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