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Since monthly payments 

spread the cost of a mort-

gage over a long period of 

time, it’s easy to forget the 

total expense. For exam-

ple, if you borrow $200,000 

for 30 years at 6% interest, 

your total repayment will 

be around $431,680, more 

than two and a half times 

the original loan.

What seems like  

minor differences in  

the interest rate can 

add up to a lot of 

money over 30 

years. At 7% 

the total repaid 

would be $479,160, 

about $47,480 more 

than at the 6% rate.

PAYING OFF YOUR LOAN

You repay a mortgage loan in a series of

 

monthly installments over the term, a

  

process known as amortization. Over

  

the first few years, most of each payment

 

is allocated to interest and only a small

 

portion to paying off the principal. By year

 

20 of a 30-year mortgage, the amounts

  

allocated to each equal out. And, by the

 

last few years, you’re paying mostly

  

principal and very little interest.

CUTTING MORTGAGE EXPENSES

The amount you borrow, the finance

 

charges—which combine interest and

 

fees—and the time it takes you to repay

 

are the factors that make buying a home

 

expensive. So finding a way to reduce one

 

or more of them can save you money

Make a larger down payment. 

The less you borrow, the less interest you’ll 

pay. Since the interest is calculated on a smaller

 

base, your payments will be lower. And if your

 

down payment is at least 20% of the purchase

 

price, you won’t be required to purchase private

 

mortgage insurance (PMI), which adds to your

 

borrowing costs. 

A POINT WELL TAKEN

Lenders might be willing to raise a loan’

interest rate by a fraction (say 

1

8

% or 

1

4

%) 

and lower the number of points—or

  

the reverse—as long as they make the

 

same profit. The advantages of fewer

 

points are lower closing costs and laying

 

out less money when you’re apt to need

 

it most. But if you plan to keep the house

 

longer than five to seven years, paying

 

more points to get a lower interest rate

 

will reduce your long-term cost. 

OTHER COSTS OF OWNING

Principal and interest are major compo

-

nents of the cost of buying a home, but

 

they aren’t the only ones. You’ll also

  

owe real estate taxes, which can vary

  

dramatically from state to state and

  

from region to region within a state.

The primary drawback to a larger down pay

-

ment may be cutting too deeply into your savings,

 

making it difficult to cover other expenses.

Consider a shorter loan. With a 

shorter term, you pay less interest overall 

on the same principal. You may also qualify for

 

a somewhat lower APR, which would reduce your

 

total cost even more. But your monthly payments

 

are higher than if you choose a longer term. So

 

you run the risk of committing yourself to larger

 

payments than you can afford.

Make more payments. You can  

pay more than the amount required by 

your contract, either by making more payments

 

or paying an extra amount with each regular

 

payment. If you do the latter, be sure to make

  

it clear that the extra amount should be used to

 

reduce principal, not prepay interest. Lenders

 

may offer a bi-weekly payment plan, but  

managing the extra payments yourself gives you

 

more flexibility and may reduce the loan faster

.

However, you might earn more by investing

 

the money than you would save by paying off

  

the principal faster, particularly since you’d still

 

end up paying most of the interest.

The taxes, which are based on the 

assessed value of your property and the

 

municipality’s tax rate, typically pay for

 

public schools, police and fire protection,

 

highways, and a raft of other government

  

services. Assessed value, which is deter

-

mined by an assessor working for a

 

particular municipality, usually differs,

  

at least to some extent, from both the

  

market value and the appraised value.

 

There is also the cost of homeowners

 

insurance, which your lender will  

require to protect its investment and

 

which you should have to protect your

 

equity. You may also be required to have

 

flood insurance, which is separate. 

In most cases, your monthly mortgage

 

payment includes all four costs, typically

 

shortened to PITI, for principal, interest,

 

taxes, and insurance.

+

+

+

=

LOAN AMOUNT 

(PRINCIPAL)

The amount you borrow. This is the

 

amount plus interest that you must

 

repay over the term of the loan.

INTEREST

Interest is the percentage of  

principal you pay to borrow. It’s  

the primary component of the APR,

 

and is determined in large part by 

 

the current cost of borrowing in the

 

economy and your creditworthiness.

POINTS  

(PREPAID INTEREST)

Interest that you prepay at the  

closing. Each point is 1% of the  

loan amount. For example, on a 

$90,000 loan with two points,  

you’d prepay $1,800.

FEES

Fees include application fees, loan 

origination fees, and other initial  

costs imposed by the lender.

THE COST  

OF YOUR HOME

TERM

(LENGTH OF  

THE LOAN)

The longer the term, 

the lower the monthly 

payments, but the 

more you’ll pay  

in total. 

RATE

Over time, a lower 

interest rate will have 

the greatest impact  

on overall cost.

The Cost of a Mortgage

The cost of a mortgage depends on the amount you borrow

the APR, and how long you take to repay

.

Bottom line: Any  

of the factors will  

increase the overall  

cost, but a higher inter- 

est rate and longer  

term will have the 

greatest impact.

THE EFFECT OF THE TERM ON A $1

00,000 MORTGAGE

1

1

2

2

3

3

 Monthly amount at different inter

est rates

Term

6%

6.5%

7%

7.5%

15-year

$1,688

$1,742

$1,798

$1,854

30-year

$600

$632

$665

$699

Total payment

Term

6%

6.5%

7%

7.5%

15-year

$303,840

$313,560

$323,640

$333,720

30-year

$431,640

$455,040

$479,160

$503,280

11

10

HOME FINANCE

HOME FINANCE

HOME FINANCE

HOME FINANCE

Home Finance

 walks you through the process of 

buying a home—from the initial decision to buy, 

through finding an affordable mortgage, and  

choosing which kind of mortgage will work best  

for you. Other topics include what happens at the 

closing, insuring your home, some of the major  

responsibilities you’ll have as a homeowner,  

refinancing, and home equity borrowing.

VIRGINIA B. MORRIS

 ANd 

keNNetH M. MORRIS

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