For a lot of people considering buying a home in the Nashville area, when they hear the word "mortgage," what typically comes to mind is the traditional 30-year home loan. It’s the most talked about loan - and a "30-year fixed rate" mortgage is the most popular mortgage term.
According to the Mortgage Bankers Association, 71% of home buyers applying for a mortgage (2016) go for a 30-year fixed rate loan. But, 30 years isn’t the best mortgage term length for everyone - and do you choose the mortgage term that's right for YOU? The answer depends on how much you can afford, and whether your priority is more monthly cash flow or interest savings.
Lower Monthly Payments - Longer Term Mortgage
A longer term mortgage loan means a lower monthly payment. It also means more interest accrued over the life of the loan. Here is an example: With a 30-year mortgage of a house with a purchase price of $200,000, and an interest rate of 4%, you're monthly payment (not including tax and insurance) would be $955. Whereas, with a 15-year mortgage for the same amount, and a 3% interest rate, you would have a monthly mortgage payment of $1,381 - a difference of $426 a month.
What You Would Pay Over the Life of The Loan
With the scenario above, $426 a month may seem like a big number - but it doesn’t seem that big next to the total amount you would be paying over the life of the loan. Using the same numbers (just for the purchase price), a 30-year loan would end up costing you $343,739 - and the 15-year loan would cost you $248,609 - a difference of $95,130.
Choosing to Pay Extra Each Month
If you need the low payment that a 30-year mortgage offers, but the interest over the life of the loan makes you a bit uneasy, you can always choose to pay extra toward your monthly payment. By paying just $100 extra per month, you could save almost 5 years and approximately $27,000.
Also keep in mind that just because you get a 30-year or 15-year mortgage, it doesn’t necessarily mean that you have to stay in it for the life of the loan. There is always have the option to refinance.
When buying a home in the Nashville area, it's a good idea to discuss your financial goals with a reputable lender you trust, one who can help you decide which loan options are best for you!
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