The Cost of a Mortgage
Minor differences in the interest rate — 6.5% vs. 6% — can add up to a lot of money over 30 years. At 6% the total repaid would be $215,842, about $11,703 less than at the 6.5% rate. Of course, many borrowers refinance or sell before the end of the loan term, so the differences between the rates are less dramatic.
The amount you actually borrow including fees and points that are deducted. It's the basis for figuring the real cost, or APR (annual percentage rate), on the money you're borrowing.
What you pay to borrow the money. The amount, repaid along with part of the principal in regular installments, is determined by the interest rate and the term of the loan.
Interest that you pay at the closing as a cost of arranging the loan. Each point is 1% of the loan amount. For example, on a $90,000 loan with 3 points, you'd prepay $2,700.
Fees include application fees, loan origination fees, and other initial costs imposed by the lender.
CUTTING MORTGAGE EXPENSES
You can reduce your cost several ways.
Consider a shorter mortgage. With a shorter term, you'll pay less interest overall, and your monthly payments will be somewhat larger. A 15-year mortgage, as opposed to a 30-year mortgage for the same amount, can cut your total cost by more than 55%. Some banks offer 20-year or 25-year mortgages, which reduce the overall interest cost without significantly raising monthly payments. At the other end of the scale, some lenders are also offering 10-year loans, which can be affordable when the interest rate is low.
With bi-weekly payments you make 26 regular payments instead of 12 every year. The mortgage is paid off more quickly, and you pay less interest. But you may have to pay higher fees to arrange and follow this payment schedule.
Be sure the lender knows you want the extra payments credited toward the principal. Your mortgage bill should have a line for entering the additional amount, and you can send a separate check. When you pay extra, you can change the amount or stop at any time.
The catch to additional payments: You may come out ahead by investing your extra cash elsewhere. This is especially true in the last years of a fixed-rate loan, when you're paying off mostly principal so you can't reduce the interest cost by very much.
|Number of points||1||2|
|Cost of points||$1,000||$2,000|
|Year 1 total||$9,186||$9,980|
|Year 2 total||$17,372||$17,960|
|Year 3 total||$25,558||$25,940|
|Year 4 total||$33,744||$33,920|
|Year 5 total||$41,930||$41,900|
|Year 10 total||$82,860||$81,800|
|Year 30 total||$246,580||$241,400|