The American Dream of home ownership means different things to different people. According to Zillow.com, nearly 29.3 percent of homeowners — or 21 million Americans — completely paid off their mortgages and own their homes outright, thereby making their dreams a reality.
On the other hand, Zillow also reports that at least 14 million homeowners are underwater – or have negative home equity. For example, let’s say that when a homeowner purchased a house a few years ago for $400,000. However, now it’s only worth $210,000 – but they still owe the mortgage company $350,000.
There are also millions of people who have fallen behind on their payments, and are dangerously close to having their homes seized by the bank for nonpayment. For these people who face an uncertain future, the American Dream has morphed into a financial nightmare.
Somewhere in between these opposite ends of the spectrum, you’ll find the rest of the country, probably in one of two groups. The first group consists of people who make timely monthly mortgage payments and mistakenly call themselves homeowners. However, technically speaking, unless you have a zero balance on your mortgage, you don’t really own your house. Not really.
The mortgage company owns it, and they’re just letting you stay there as long as you comply with the term of your mortgage agreement. Want to test this theory? Miss a few payments, and you’ll find quickly find out who really owns the place you call your home.
The other group of people consists of those individuals who are renting houses or apartments, or perhaps are staying in a house that they inherited from their parents or grandparents. They may be weighing the pros and cons of actually taking the plunge to buy a house in the suburbs or a condo in the city.
But how much do you really pay when you sign on the dotted line to get a home mortgage – a process commonly known as “signing your life away,” in the pursuit of the American dream?
Well, the answer depends on several factors, including the amount of the loan, the duration of the loan, the monthly mortgage payment amounts, and the loan’s interest rates.
Interest Rate Rules
Let’s say you purchased a $200,000, 30-year mortgage at a 4.53 percent interest rate. Your monthly mortgage payment would be $1,017 – which sounds pretty good. However, during the first 5 years, you would end up paying $43,415 in interest. And at the end of the 30-year loan, you would have paid $166,098 in interest. And the total amount that you would have paid for a $200,000 loan is $366,098.
Now, if you had a higher interest rate, like 6.00 percent, for a 30-year, $200,000 loan, you would pay $1,199 a month. After the first five years, you would have paid $58,055 in interest, and over the lifetime of the loan, you would have paid $231,676 in interest. And the total amount you would have paid for your loan is $431,676.
Also, if you opted for an adjustable rate mortgage, depending on the terms of the mortgage, your initial rate and the frequency of rate changes would determine how much you paid over the lifetime of the loan. For example, it may have started off at a low rate like 4.25 percent, but it’s subject to jump several interest points. And the higher the interest rate, the more money you pay in interest, and the higher your total mortgage payoff.
15-Year Vs. 30-Year Mortgages
If you chose a 15-year mortgage instead of a 30-year mortgage, you would pay a larger monthly payment, but less interest over the lifetime of the loan – and that lifetime would be cut in half. For example, if you purchased a $200,000, 15-year fixed-rate mortgage at 4.53 percent, at the end of 5 years, you would have paid $39,701 in interest. At the end of the 15-year loan period, you would have paid $75,950 in interest, for a total loan amount of $275,950. And, you would have saved $90,148 in interest over the lifetime of the loan vs. the interest you would have paid with a 30-year mortgage.
Bi-Weekly Mortgage Payments
Making bi-weekly — instead of monthly — payments, can actually decrease the total amount that you pay for a mortgage. That’s because there are 12 months in the year, so if you pay on a monthly basis, you will make 12 payments yearly. However, there are 52 weeks in the year, so if you pay every other week, you will make 26 half-payments yearly, which is the equivalent of an extra month’s worth of payments each year. This can shave roughly 6 months of payments off of your total mortgage amount.
So, if you have a $200,000 loan at 4.53 percent interest, instead of paying $1,016.19 a month, you would pay $508.47 every other week. It may be hard to believe, but this small change can save you a significant amount of money. At the end of the loan period, you would have paid $136,692.71 in interest, instead of the $166,097.97 interest amount from making monthly amounts, saving $29,405.26 in interest over the lifetime of the loan.
For A Few Dollars More
Paying even a few dollars more on your monthly mortgage payments can allow you to reduce the total amount that you pay over the lifetime of your mortgage. For example, according to Tracey Piercy of MoneyMinding.com, if you have a $200,000, 30-year loan and your monthly mortgage payment is roughly $1,017, adding just $100 a month to your payment can shorten your mortgage by 5 years, and save you $32,052 in interest over the lifetime of the loan.
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