Lifetime savings. It isn’t something we think about on a daily basis. Although I probably should, I’m not walking around thinking how much I could save over 30 years if I didn’t buy myself a cup of coffee every morning. But if you’re in the market to refinance or purchase a new home, savings over the life of your loan should be at the top of your mind.
How can you save over the life of your loan? It’s simple, you pay less interest. Let’s crunch some numbers.
If you have a $200,000 30-year fixed-rate mortgage with an APR of 4.599%, your monthly payment would be $998.58, and the total amount of interest you’ll pay is $159,640. That same loan amount with a 15-year fixed-rate mortgage (3.758% APR) gives you a monthly payment of $1,417.52 and a total interest amount of $55,240. So, if you went with the 15-year fixed-rate loan, you would be paying $419 more every month, but you’d save $104,400 in interest over the life of your loan.
But what if you don’t want to go into a 15-year mortgage? Is there any other way to save on interest over the life of your loan? Yes, with an adjustable rate mortgage (ARM). ARMs can still have a 30-year term, but the interest rate will be fixed for a period of 5, 7 or 10 years. After that fixed-rate period, the interest rate may adjust once per year depending on the market conditions.
A lot of people opt for a fixed-rate mortgage over an ARM because a fixed rate ensures that you have the same rate for the entire span of the loan. However, adjustable rate mortgages typically have a much lower interest rate than a 30-year fixed-rate loan – often a whole percentage point lower. If you aren’t planning to stay in your home for 30 years, you might end up paying a good chunk of cash in interest for unused rate protection.
Let’s crunch some numbers again. Take that $200,000 loan on a 30-year fixed-rate mortgage with an APR of 4.599% (monthly payment of $998), and compare it to the 5-year ARM with an APR of 3.038%, which has a monthly payment of $829. With the 30-year fixed-rate loan, you’ll end up paying $10,140 more during the first 5 years, simply to make sure your rate doesn’t change for the next 25 years. If you don’t plan on staying in your house that entire time, there’s no need to pay that extra amount in interest.
With an ARM, your rate could even go down after the initial fixed-rate period, saving you even more money over the life of your loan. However, if the market conditions drive the rate up, there are rules that protect you. All rate changes are capped at 5% above your initial rate. This means that if your initial rate is 2.99%, your adjusted rate will never exceed 7.99%. Plus, with the new Qualified Mortgage rules, you’ll know up front that you can afford your mortgage payment after adjustments. ARMs aren’t right for everybody, but you should find out if they’re right for you.
There are other ways to save money over the life of your loan, like paying more each month. Take a look at all of your loan options and choose the right fit for you. If you need help crunching the numbers, we’ve got a wide array of calculators to help you do that. Or, if you would rather just talk to someone, there are home loan experts available to chat 24/7.