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’s 

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.

THE EFFECT OF THE TERM ON A $100,000 MORTGAGE

1

1

2

2

3

3

Monthly amount at different interest 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

HOME FINANCE

HOME FINANCE

HOME FINANCE

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