Total Cost of Credit VS Monthly Payments

Total Cost of Credit VS Monthly Payments
Nowadays you can often hear about things that make loans “more affordable”, at least in terms of monthly payments. One of them is extended over 40 year period mortgage loan. You need to be very careful with those things and think twice before applying for such a loan. The thing is that while monthly payments can be a little lower, overall amount of interest that you will pay on your loan will be significantly higher.

Let’s analyze the following example. Say you want to buy a $100,000 house. If you choose to apply for a 30 year period loan with interest rate of 6%, your payments are going to be about $600 per month, so you pay about $216,000 during the whole period, where $116,000 is interest. If you apply for a 40 year period loan, your rate is going to be about .25% higher (6.25%). This means that even though you’ll have to pay about $565 per month (which is $35 less), your total payments during the life of the loan will make about $271,000.

So due to .25% to .50% higher interest rates and 10 additional years that you have to make your mortgage payments for you pay total of almost 50%, or about $55,000, more interest for a 40 year period loan comparing to a 30 year period one. Another thing is that your home equity builds up much slower when your debt is extended to the 40 year period.

So even though it may sound like a good idea to apply for a 40 year period mortgage, it is better to think over it once again. Think in terms of total payment not only a certain amount that you pay each month. This works not only for your mortgage loan, but for any indebtedness that you have, including your car loan, personal loans, credit card debts, etc. Lenders are well aware that time is money. Be as aware.

© 2010, Jericho Mortgage — Total Cost of Credit VS Monthly Payments