The Real Cost of a Mortgage
So you are thinking of buying a house. There is a lot to consider! Obviously a major one is the mortgage. A mortgage is very likely the largest loan you will ever have, so it’s important to understand what you are signing up for.
Each mortgage will have different terms that will affect how much you pay. The main components that affect the overall cost of the mortgage, (how much you will ultimately pay on top of the money you borrowed) is the length and interest rate.
Most mortgages are 30 years, however 5, 10 and 15 year terms can also be found fairly easily, but are less common. The shorter terms will carry a higher monthly payment, but will cost you less in interest over the life of the loan, all other things being equal, and assuming you pay it back on schedule.
Interest rates fluctuate all the time based on a variety of factors in the economy. Your credit score will also dictate what a mortgage company will offer you for interest rates, within the range of what’s currently being offered. When you are talking about a multi-hundred thousand dollar purchase, even a half of a percent can mean thousands of extra dollars in interest payments each year.
I bet now you are wondering how exactly you calculate the cost of a mortgage. Well, you can use this simple formula to get yourself a general idea:
(Loan Amount x Interest Rate x Length of Loan in Years/Total Number of Payments) x Total Number of Payments = Total Cost
Basically, this formula will give you an idea of how much your property is really costing you (actually purchase price plus interest payments). The goods news is, if you pay it off ahead of schedule, even by a little bit, (check out our post on this) you’ll save yourself thousands of dollars.
You can also send us an email and we’ll send you our mortgage calculator for the detailed version, where you can play around with all the possible numbers and scenarios.