|Length :||30 Yrs 0 Mts||25 Yrs 3 Mts|
|Time Saved :||4 Yrs 9 Mts|
|Bi-Weekly Payment :||-||$671.03|
|Monthly Payment :||$1,342.05||$1,453.89|
|Total Interests Paid :||$233,139.46||$189,734.44|
|Interest Savings :||$43,405.02|
|Tax Savings :||$60,616.26||$49,330.95|
|Tax Saving Losses :||$11,285.31|
(Int. Savings - Tax Saving Losses) :
When you set up your mortgage payment repayment plan, you can choose between a standard repayment plan or a bi-weekly repayment plan. With the standard plan, it would take you 30 years to repay the loan while a biweekly plan will take 25 years and 3 months. This will save you 4 years and 9 months. But, the savings doesn't end there.
If you took out a $250,000.00 loan with an interest rate of 5.000% and your federal tax rate is 26.000%, you can expect to pay $1,342.05 per month, while a bi-weekly payment plan will call for a payment of $671.03 every other week. As a result, you will pay only $189,734.44 in interest with the bi-weekly schedule rather than $233,139.46 with the standard payment plan. While this will result in a loss of $11,285.31 in tax benefits, you will still save a total of $32,119.72 with the bi-weekly plan.
Every mortgage loan requires private mortgage insurance (PMI). If you, the borrower, do not put a 20% down payment on the house you must pay for this insurance premium which could be anywhere from 0.5% to 1% of the entire loan. That means that on a $200,000 loan, you could be paying up to $2,000 a year for mortgage insurance. That averages out to $166 a month ($2000/12). This premium is usually rolled into your monthly payment and protects the lender in case you default. It does nothing for you except put a hole in your pocket. Once the equity reaches 20% of the loan, the lender does not require PMI. So if at all possible, save up your 20% down payment to eliminate this drain on your finances.
Another way to save money on your mortgage in addition to adding extra to your normal monthly payments is the bi-weekly payment option. You pay half of a mortgage payment every two weeks instead of the usual once monthly payment. This essentially produces one extra payment a year since there are 26 two- week periods. At the end of the year you will have made 13 instead of 12 monthly payments. So on the 30 year $200,000 loan at 5% example we have been using, the interest was $186,511.57 using monthly payments. If using bi-weekly payments, the interest is only $150,977.71 saving you $35,533.86 over the life of the loan.
If your lender does not offer a bi-weekly option or charges for the service, you can do the same thing yourself for free. Simply add an extra 1/12 of a mortgage payment to your regular payment and apply it to principal. Our example has a monthly payment of $1,073.64, so adding an extra $89.47 ($1,073.64/12) to principal each month will produce the same result.
Unfortunately, switching may not be as simple as writing a check every two weeks. If you are already on an automatic payment plan, you will need to find out from your lender if you can cancel or change it. You will then need to find out if your lender will even accept biweekly payments, or if there is a penalty for paying off your mortgage early.
Some services offer to set up bi-weekly payments for you. However, these companies may charge you a fee for the service (as much as several hundred Dollars), and they may only make the payment on your behalf once a month (negating any savings).
Instead, you must make the payment directly to the lender yourself, and you must be sure that it will be applied right away and that the extra will be applied toward your principle.
As long as you have strong will, it's better to make the payments directly instead of signing up for an automatic payment plan since it will give you more flexibility in case of lean times.
Buying a home is one of the most expensive long term purchases you will make in your lifetime. So it's most important to know your options and choose the loan that best fits your situation.
While there are many places to get your loan, there are basically two main types of loans to consider: Fixed Rate and Adjustable Rate Mortgages (ARM). Fixed rate mortgages are loans where the interest rate remains the same throughout the life of the loan. Your principal and interest payments are the same each month so you know what to expect. You will not have to worry about the market and fluctuations in interest rates. Your rate would be fixed. This is a good option especially if you intend to remain in your house more than just a few years.
Fixed rate mortgages are usually offered for a term of 30 years, 20 years, or 15 years. Most buyers choose a 30 year mortgage because the monthly payment is more comfortable. But it would be a mistake not to consider a 15 year fixed mortgage. Yes, the monthly payments are higher but the savings over the life of the loan are significant. If you took out a $200,000 mortgage at 5% for 30 years, your monthly principal and interest payment would be $1,073.64 and you will have paid $186,511.57 in interest. BUT, if you took out a 15 year loan for the same amount and interest rate, your monthly principal and interest payment would be $1,581.59 and you will have paid $84,685.71 in interest - a savings of over $100,000! Again, yes, the monthly payment is higher but with a little sacrifice, think of what you could do with an extra $100,000 of your own hard earned money? Why should you give it to the bank?
Adjustable Rate Mortgages (ARMs) are the opposite of fixed rate mortgages. The interest rate adjusts just as the name implies. The rate will change annually according to the market after the initial period. One year ARMs used to be the standard, but the market has now produced ARMs called hybrids which combine a longer fixed period with an adjustable period. The initial period can be three years (3/1), five years (5/1), seven years (7/1) or ten years (10/1). So a 5/1 ARM means that during the initial period of 5 years, the interest rate is fixed and thereafter will adjust once a year.
The one reason to consider the ARM is that the interest rate at the initial period of the loan is usually lower than the interest rate for fixed mortgages. If you know you will be in your house only a few years, or if you think interest rates will decrease, this may be a good option for you. If you plan to stay longer, then make sure you have a way to increase your income to offset the increased mortgage payment.
You are not in the dark about rate increases with an ARM. Each loan has set caps that govern how high or low the interest rate can increase or decrease for the life of the loan. Caps are also in place for each adjustment period after the initial fixed period. These terms will be clearly stated in the loan paperwork. Don't hesitate to ask the lender questions about interest rates, caps, initial period, etc. so you will fully understand what you are undertaking.
After choosing either a fixed rate mortgage or an ARM, you will also need decide which loan product is right for you. Each has different requirements, so click on the links to get full details.
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