Car loans: up to 5 years repayment
Student loans: 10 years standard repayment
Home Mortgage: 15 to 30 years repayment
This debt will be with you for a long time. According to the US census, about seventy percent of US homes have a mortgage. Record rates of foreclosure after the burst of the housing bubble give the mortgage a bad name, but at its core it is a beneficial tool to help homeowners. The long repayment period means that small actions can add up to big savings in the long term.
Simply paying a little extra toward your mortgage each month can help pay off the balance sooner and reduce the amount of interest you will accumulate. Make additional payments by sending a check separate from your regular payments and specify that you want to apply it to the loan principle; otherwise your lender may apply the money to the next payment owed and still charge interest. Make sure your mortgage does not include a prepayment penalty or “service charges” for extra payments.
Also consider a mortgage with biweekly rather than monthly payments; synchronized paychecks and mortgage payments may help simplify your budgeting and make paying down the mortgage a financial priority. Take, for example, a thirty-year mortgage for $100,000 at 3.6% interest. With a standard plan, you would pay $63,000 in interest over the life of the loan. Now suppose that after a year in the house you feel more financially stable and begin making an extra payment of $50 each month. The extra payments shorten the loan by almost five years and save you over $10,000 in interest! The mortgage prepayment calculator from DecisonAide.com can crunch the numbers and show how much your extra payments will save.
A mortgage from your lender is not the only option for financing your home purchase. You may be able to assume the mortgage on the house you are buying and take advantage of the existing interest rate if it is lower than the current market interest rate. In addition, you will avoid settlement costs on a new mortgage. Note that assuming a previous mortgage is not the best option in all cases. Make sure you understand the terms of the mortgage you assume, as you would with any new loan.
A seller may offer financing directly; you make payments to the seller over time instead of taking a loan to pay the seller and making regular payments to a lender. You can negotiate your interest rate and avoid fees from a lender. Most sellers expect a short-term mortgage, no more than five years, at which time the buyer will likely take out a traditional mortgage. An attorney or real estate agent can help with the legal documents and paperwork to smooth out the process.
A long-term debt like a mortgage need not be a long-term worry. Making extra payments or taking a new approach to borrowing can reduce your interest payments and shorten your loan term with ease and simplicity.