Interest vs Principal

If you have ever sat down and closed on a home then you have seen the Truth-In-Lending Disclosure Statement. This document tells you the outrageous amount of interest you will pay over the life of your loan.

truth in lending

The main focus of this statement is the Finance Charge.  This is the total interest you will pay over the life of the loan. The truth is I don’t like to pay extra for anything.  I always try to get the lowest rate possible whether its a car loan or a mortgage.  This isn’t my statement but an example, but mine is just as shocking.  The way a mortgage is set up and amortized is to pay the majority of the interest up front and over time will reduce as the principal starts to become a majority of your payment.

Look at the facts and don’t get caught up in the deal.  Be sure to use a mortgage calculator to see what the payments would be on a 15-year mortgage versus a 30-year mortgage.  If you can make a larger payment every month then a 15-year mortgage is the right choice for you. If not, take the 30-year mortgage and pay extra on the principal each month.  Most mortgage companies will allow this, but check with yours to make sure. This way you will pay less interest over the life of the mortgage and if you get in a bind you will have the freedom to start making lower payments.

For example, I am using an interest rate at 4% and home mortgage amount of $200,000.

30 Year –  Total Interest Paid $143,739

15 Year – Total Interest Paid $66,287

The difference is staggering. Play with the numbers on Bank Rate or Mortgage Calculator and be mindful the next time you buy a house.  We have personally made the switch from a 30-year mortgage to a 15-year mortgage. At the beginning of our 30 year mortgage, the first 8 months we paid $2,000 towards the principal.  Then when we switched to the 15-year mortgage we paid $6,000 towards the principal in the first 8 months. So not only do you pay less in interest over the life of your loan but drastically increase your equity month to month.

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