|
The first thing most of us think about
when the time comes to take out a
mortgage on a new home is the interest
rate.
That's both perfectly natural and
very sensible. The rate of interest we
pay can make an immense difference - a
difference amounting to tens of
thousands of dollars - in what the
actual cost of our house ultimately
turns out to be.
Still, interest rates are far from
the only thing worth thinking about
where mortgages are concerned. Other
important variables need to be
considered too. One is the question of
whether to take a fixed interest rate of
choose from among the many kinds of
variable-rate mortgages that have been
created over the years to meet the
differing needs of different buyers.
Another, and a very important one, is
the rather basic question of how long
you want your mortgage to run. Even with
fixed-rate mortgages, a broad spectrum
of time spans is commonly available. In
most cases the extremes are 15 years on
the short side, 30 years on the long.
Some years ago, when a famous
scientist was asked to name the most
powerful force in the universe, he
answered "the power of compound
interest." This reply suggests that
he was knowledgeable not only about the
laws of nature but the principles of
finance, about what happens to even a
modest sum of money when it continues to
accumulate interest year after year
after year.
Even at a modest rate of interest,
money in a savings account can double
within ten years or less. The amount
actually paid for a house with a
$100,000 mortgage can turn out to be
several hundred thousand dollars if the
mortgage runs for 30 years.
When you opt for a mortgage of only
15 or 20 yeas, on the other hand, you
chop off much of the growth in your
total obligation. But to do that without
reducing the initial size of your
mortgage, you have to make a bigger
payment every month. As in most of
life's major decisions, the stakes are
high and the trade-offs require careful
consideration. Above all, they require a
careful examination of your resources,
your aspirations, and your personal
priorities.
Someone who's willing to make
near-term lifestyle sacrifices for the
sake of long-term gains probably will
prefer a shorter mortgage. If your motto
is "eat, drink and be merry,"
on the other hand, the idea of squeezing
extra money out of your budget for the
sake of a bigger house payment won't
have much appeal.
If you're attracted by a shorter,
faster mortgage and think you might be
able to handle one, ask your real estate
agent to show you just how much
long-term savings such an approach can
make possible. Chances are you'll be
astonished by the size of the number.
Remember, though, that a 15-year or
20-year mortgage, by increasing your
monthly obligations now and for years to
come, can sharply reduce your
flexibility.
One good approach is to take a
30-year mortgage but try to discipline
yourself to make one extra monthly
payment each year. If you can stick to
such a regimen, ultimately it will yield
the benefits of a 15-year mortgage.
Meanwhile, you'll be less strapped if
changing circumstances reduce your
ability to make monthly payments.
What's really important is making
yourself aware of how many different
options you have and gathering detailed
information about the ones that interest
you most. A good real estate broker can
be your key to all the information you
could possibly need.
.
|
