Lengthen Your Mortgage

15-Year, 30-Year, or a Biweekly Mortgage?

Today, lenders offer a wide array of loan types in varying lengths, including 15, 20, 30 and even 40-year mortgages.

Deciding which length is best for you should be based on several factors, such as your purchasing power, anticipated future income and how disciplined you want to be about paying off the mortgage.

Benefits of a shorter loan term 

Some homeowners choose fixed-rate loans that are less than 30 years to save money, by paying less interest over the life of the loan.  A $100,000 loan at 8 percent interest has a monthly payment of around $734 (excluding taxes and homeowner's insurance). Over 30 years, this adds up to $264,240. Over the life of the loan you would pay $164,240 in interest alone.

With a 15-year loan, the monthly payments on the same loan would be approximately $956, for a total of $172,080. The monthly payments are more than $200 more than a 30-year mortgage, but over the life of the loan you would save more than $92,000.

Advantages of a 30-year loan.

Despite the interest savings, a 15-year loan is not for everyone. The higher monthly payment could cause difficulty in qualifying for a home that is affordable with the lower payments of a 30-year mortgage. Lower monthly payments can provide a sense of security if your earning power decreases.

With a bit of financial discipline, there are a variety of methods that can help you pay off a 30-year loan faster with only a moderately higher monthly payment. 

Biweekly mortgages

Biweekly mortgage payments are made every two weeks, which over a year works out to the equivalent of making one extra monthly payment (compared to a traditional payment plan). Switching from a traditional payment plan to a biweekly mortgage can actually shorten the term of a 30-year loan by several years and save thousands in interest. In many cases, lender will offer direct payment services that automatically withdraw funds from your account to make payments too.

Making extra payments yourself--do it early!

Including extra funds with your monthly payment will pay down your loan faster as well. Most lenders will allow you to make extra payments towards the principal balance of your loan without penalty. This is especially attractive to homebuyers who are concerned about their future earning power, but still want to be aggressive about paying off their loan.

You might decide to send the equivalent of one or two extra payments a year (which could shorten the overall length of the loan by many years). But if your financial situation suddenly changed, you could go back to a regular monthly payment.

If you do send extra funds, do it EARLY in the life of the loan. Most home loans are calculated so the first few years of payments are almost entirely interest, while the last few years are mostly applied towards the principal balance. You get the most bang for your buck by making the extra payments early in the life of the loan.

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