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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 30year 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 longterm 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 biweekly 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%
15year
$1,688
$1,742
$1,798
$1,854
30year
$600
$632
$665
$699
Total payment
Term
6%
6.5%
7%
7.5%
15year
$303,840
$313,560
$323,640
$333,720
30year
$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
Lightbulb Press, Inc.
www.lightbulbpress.com
info@lightbulbpress.com Phone: 2124858800