read a press release the other day which points to the fact we need to
be very careful with our finances. The subject of the release was home
mortgages. A company was announcing the availability of 40 year mortgages
for its customers. The stated purpose was to lower the monthly payments
to make buying a home more affordable.
Whenever I hear the phrase “more affordable”, I put my hand
on my wallet because the attempt to empty it will begin any moment. Almost
never is that phrase used in relation to the total cost of financing.
It isalways used in reference to the size of the monthly payment, as in
Let’s see what it really means. I did the math. A mortgage for a
$100,000 home at 6% for 30 years would have a monthly payment of about
$600 for principal and interest. You would pay about $216,000 over the
life of the loan of which $116,000 would be interest..
A mortgage on that same home for 40 years would be at 6.25%, with a monthly
payment of $565. The payments over the life of the loan would total about
$271,200 and $171,200 of the total would be interest.
The forty year mortgage has a higher interest rate (usually between.25
and .50 percent) because the lender has his money at risk for
a longer time (Lenders are well aware that time is money. You
should be as aware).
This higher rate coupled with the extra ten years of the loan,
has the borrower paying 47% more interest, or $55,000 more over
the life of the loan. Even with a lower payment that supposedly
makes it more affordable to purchase that home. Sounds like a
pretty good deal for the lender.
Another problem the borrower faces is building equity much more
slowly in the beginning of the loan. The extra interest expense
paid for the extended length of the loan prevents equity from
building up quickly. All of this for a monthly payment that is
only $35 less.
You need to think in terms of overall cost and not just monthly
payments. The total cost is what you will give back to your creditors.
The focus on the monthly payment takes attention away from the
total amount to be repaid. You need to look at this with any indebtedness,
car payments, personal loans, credit cards: figure the total cost,
not just what you pay each month.
You'll begin to hear more about these loans I'm sure. Think long
and hard before you lengthen your indebtedness. The goal is to
become debt free and to do it as fast as possible. Advise your
families and friends to do the same.
David Wilding works with indiviuals and groups to help them get
rid of debt. For the past ten years he has attempted to change
attitudes toward and acceptance of personal debt. Visit his website
for more ideas, tools, and strategies to become debt free.
Cost Of Credit vs Monthly Payments