How Long Your Mortgage Runs Determines How Much You Pay

The length of your loan has the greatest factor on how much you pay for your home.

by W. Troy Swezey

December 2, 2003

The first thing most of us think about when the time comes to take out a mortgage on a new home is the interest rate.

That’s both perfectly natural and very sensible. The rate of interest we pay can make an immense difference – a difference amounting to tens of thousands of dollars – in what the actual cost of our house ultimately turns out to be.

Still, interest rates are far from the only thing worth thinking about where mortgages are concerned. Other important variables need to be considered too. One is the question of whether to take a fixed interest rate of choose from among the many kinds of variable-rate mortgages that have been created over the years to meet the differing needs of different buyers.

Another – and a very important one – is the rather basic question of how long you want your mortgage to run. Even with fixed-rate mortgages, a broad spectrum of time spans is commonly available. In most cases the extremes are 15 years on the short side, 30 years on the long.

Some years ago, when a famous scientist was asked to name the most powerful force in the universe, he answered “the power of compound interest.” This reply suggests that he was knowledgeable not only about the laws of nature but the principles of finance – about what happens to even a modest sum of money when it continues to accumulate interest year after year after year.

Even at a modest rate of interest, money in a savings account can double within ten years or less. The amount actually paid for a house with a 0,000 mortgage can turn out to be several hundred thousand dollars if the mortgage runs for 30 years.

When you opt for a mortgage of only 15 or 20 yeas, on the other hand, you chop off much of the growth in your total obligation. But to do that without reducing the initial size of your mortgage, you have to make a bigger payment every month. As in most of life’s major decisions, the stakes are high and the trade-offs require careful consideration. Above all, they require a careful examination of your resources, your aspirations, and your personal priorities.

Someone who’s willing to make near-term lifestyle sacrifices for the sake of long-term gains probably will prefer a shorter mortgage. If your motto is “eat, drink and be merry,” on the other hand, the idea of squeezing extra money out of your budget for the sake of a bigger house payment won’t have much appeal.

If you’re attracted by a shorter, faster mortgage and think you might be able to handle one, ask your real estate agent to show you just how much long-term savings such an approach can make possible. Chances are you’ll be astonished by the size of the number.

Remember, though, that a 15-year or 20-year mortgage, by increasing your monthly obligations now and for years to come, can sharply reduce your flexibility.

One good approach is to take a 30-year mortgage but try to discipline yourself to make one extra monthly payment each year. If you can stick to such a regimen, ultimately it will yield the benefits of a 15-year mortgage. Meanwhile, you’ll be less strapped if changing circumstances reduce your ability to make monthly payments.

What’s really important is making yourself aware of how many different options you have and gathering detailed information about the ones that interest you most. A good real estate broker can be your key to all the information you could possibly need.