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How Does the Term of a Home Loan Affect Payment and Interest?

Mortgage
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The term of your mortgage refers to how many years it will take you to pay of your mortgage. When considering the home loan term, interest payment calculations should be factored in. Interest payments refer to the amount of money you pay each month in interest. This is largely determined by how much you borrow and what your interest rate is. If, for example, you borrow $100,000 at 6.5 percent interest, your home loan interest payment is $6000 per year. The term of your mortgage plays an important role in determining what your interest rate is, and in determining how long you have to make payments. Thus, the term of your mortgage is the key determining factor in calculating your home loan term interest payment.

Home Loan Term Interest Payment Information

There are several standard mortgage financing options available to most buyers when they purchase a home. These options include:

  • 15-year fixed rate mortgage
  • 30-year fixed rate mortgage
  • Adjustable rate mortgage (ARM)
  • Hybrid Loan (Adjustable & Fixed Rate)
  • Balloon Mortgage
  • Interest Only Mortgage

How Your Home Loan Term Affects Interest Rates

Generally, a fifteen year fixed rate mortgage will allow you to pay the least in interest of any of your loan options, although there are exceptions to this rule. A 15-year fixed rate mortgage has a lower interest rate than a 30-year fixed rate mortgage. You also pay back your mortgage in fifteen years, so you are paying interest for a shorter duration of time.

Because you are paying the loan off in a shorter period of time, your monthly payments are usually higher for a fifteen year mortgage than if you took a 30-year mortgage, even with the lower interest rate. A $100,000 loan at 6.5% for 30 years has a monthly payment of approximately $775.00 and you will pay back over $67,000 in interest over the life of the loan. A 15-year mortgage, at a lower interest rate of 6% will require you to pay approximately $980.00 per month but you will only pay approximately $56,000 in interest, saving over $11,000 in interest. Therefore, the home loan term interest payments are significantly different. If you can afford a 15 year option, this is often a wise bet.

Alternative Financing & Home Loan Term Interest Payment

Adjustable rate mortgages, hybrid loans, balloon mortgages and interest only mortgages are often considered alternative financing, since fixed-rate mortgages are the industry standard. These mortgage options may offer you a lower interest rate for a period of time, anywhere between six months and several years. During this time, you will often pay much lower payments because of the lower interest rate. In the case of an interest only mortgage, you will only be paying interest for the first several years of your loan, resulting in a much smaller payment.

However, these financing options can often end up costing you more money in the long term. Interest rates are not fixed, so they can rise- sometimes dramatically. Monthly payments can also go up significantly. Many people select these types of alternative financing when they intend to refinance their home within a few years or if they intend to move or sell their home within a few years. These investors believe the lower interest rates and payments will allow them to buy a house they could not otherwise afford, or allow them to pay lower payments while they take advantage of appreciation. However, this can be risky and often works only if property values continue to rise, which is not guaranteed. Thus, although these types of mortgages can seem attractive as they have a lower home loan term interest payment, they can be more speculative and should be considered carefully.

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