For many Americans, obtaining a mortgage is their only means to homeownership. As such, many individuals enter into their first mortgage transaction without realizing how much the interest associated with the transaction is really costing them. As the table below illustrates, the interest associated with the average mortgage can amount to thousands (or even hundreds of thousands) of dollars, and the amount of interest paid only increases as the mortgage amount increases.
The figures above are based on the average mortgage in the United States which is approximately $189,000. The table also illustrates how various loan terms can save the borrower thousands of dollars in interest and how he/she could have spent those extra savings. However, there are two sides to every coin, and as such, both the positive and negative effects should be considered when deciding on a mortgage term. . .
The Positive: Shorter mortgage terms, such as 20 or 15 year terms, typically have lower rates available to borrowers. As the table illustrates, the average rates for 20 and 15 year loan terms are currently 3.950% and 3.47% respectively. Both of which are significantly lower than the average 4.33% on 30 year loans. As one can see, the savings in interest are significant.
The Negative: While the overall savings with shorter mortgage terms is significant, the monthly payment on shorter mortgage terms will be higher because the borrower is paying back the same principal in a shorter amount of time.
While there is already a great deal to consider when entering into a mortgage transaction, as discussed and illustrated, one must consider loan terms as well. The savings from a shorter loan term could mean a new BMW or even a vacation home. With that being said, rates are still an integral part of the mortgage transaction, and unfortunately, rates are hovering at recent highs this week. As expected, rates slightly increased before the holiday as lenders braced for the long weekend. However, rates have not come down yet, and unfortunately, the economic calendar is showing very little this week to spark much movement in rates.