It can be a bit depressing to figure out how much money you’ll spend to borrow the money that you’re going to use to buy your house, but it can also tell you how you can save money on interest.
For example, on a $250,000 loan at 4.5% APR, you will pay $206,016.78 in interest over 30 years.
If you would like to have a tool to figure these numbers out yourself, you can find many of them online.
In essence, the way that payments work is that you pay the interest on the principal first, then you pay principal itself.
In our example, a $250,000 house with a 30-year mortgage at 4.5% interest, the payments are $1,266.71. The first payment will only pay off $329.21 in principal. That plus your down payment is exactly how much of your house you really own. The interest in that first payment is $937.50.
For your second payment, you’ll pay $1.36 less in interest and more in principal!
This can all seem very scary, but there are some ways to make it a lot more favorable for you.
- Pay extra every month. If you buy a house for half the price, but still pay $1200 a month, you can have the house paid off in half the time and save tens of thousands in interest.
- If you bought the same $250,000 house, but only took out a 15-year loan, your payments don’t double. They go to $1,912.48. That's less than $700 extra per month, but you will own the house outright in 15 years. That can save you $111,769.80 in interest. That’s over $100,000 you can use to live with that you aren’t giving to the bank.
- Save for a higher down payment. Every $10,000 you put on the down payment will save you almost $10,000 in interest over the life of the loan.
- Look for creative financing options. Sometimes an owner will hold the debt for less interest than the bank. In other cases, it’s possible to get less expensive loans because one is a veteran or through some other connections in the world. Search around before you just accept what you’re offered.
Interest is a necessary evil for those of us who can’t buy a house outright. In fact, many people who do have the money will borrow it because they are making more on the money they have than the cost of the loan.
Explore your options and be patient. The right advisor can help too. They can guide you in finding just the right loan for your home by looking for these options for you.