Photo: Casey Serin
When shopping for a mortgage, it’s important to obtain multiple quotes from various lenders to ensure you get the best deal, just as you would if you were shopping for a new flat-screen television or a brand-new car.Yet, only about 40 per cent of borrowers actually receive more than one quote and most people spend more time car shopping (10 hours) than mortgage shopping (5 hours). And most of these consumers probably only focus on one thing, the monthly mortgage payment.
Heck, this is what most banks and lenders focus on, so why wouldn’t consumers? But, selecting the right mortgage goes far beyond that monthly payment.
Why, you ask? Well it’s simple really. The less you pay each month, the more you pay over the life of the loan.
In short, you’ve got to look at the big picture when shopping for a mortgage, not just that “low, low payment” you see advertised.
Let’s look at a quick example to illustrate this concept, using a $300,000 loan amount:
30-year fixed mortgage @4.25%
Monthly payment: $1475.82
Total interest paid: $231,295.20
20-year fixed mortgage @3.875%
Monthly payment: $1798.24
Total interest paid: $131,577.60
15-year fixed mortgage @3.25%
Monthly payment: $2108.01
Total interest paid: $79,441.80
So here we have three fixed-rate home loan options. You’ll notice that the mortgage rate rises as the loan term gets longer.
You’ll also notice that the monthly payment drops as the mortgage term increases.
For this reason, despite the higher rate, most consumers would go with the 30-year fixed mortgage rate, which has the lowest monthly payment, making it the “best deal.”
But by doing so, these borrowers would pay $100,000 more in interest over those 30 years than a borrower who chose the 20-year fixed mortgage. And $150,000 more than the borrower who opted for the 15-year fixed.
It would also take an additional 10 and 15 years, respectively, until your home was actually yours.
Now this isn’t to say the 20-year or 15-year is necessarily a better option than the 30-year, but it does demonstrate the impact of a lower payment made over a long period of time.
And it’s certainly worth your time and consideration to weigh different options based on your unique financial profile.
If you are insistent on paying off your mortgage, going with a shorter-term mortgage, such as the 20-year fixed or 15-year fixed mortgage rate, makes sense.
But if you think your money is better served in other investments, such as the stock market or a retirement account, perhaps sticking with a traditional 30-year is your best bet.
Regardless, take the time to shop around and compare all possible loan options. Because you’re not buying a new TV, you’re financing a home — possibly one of the biggest decisions you’ll ever make.
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