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## Total Cost Of Credit vs Monthly Payments

I read a press release the other day that pointed to the fact that we need to be very careful with our finances. The subject of the release was home mortgages. A company advertised the availability of 40-year mortgages for its customers. The stated purpose was to reduce monthly payments to make the purchase of a home more affordable.

Whenever I hear the phrase “more affordable,” I reach into my wallet because the attempt to empty it will begin at any moment. This phrase is almost never used in relation to the total cost of financing. It is always used in reference to the size of the monthly payment, as in this example.

Let’s see what it really means. I did the math. A $100,000 home mortgage at 6% for 30 years would have a monthly payment of

of about $600 for principal and interest. You would pay approx

$216,000 over the life of the loan which would be $116,000

interest..

A mortgage on this same home for 40 years would be 6.25%,

with a monthly payment of $565. Payments throughout the life of

the loan would add up to about $271,200 and $171,200 of the total

would be interest

The forty-year mortgage has a higher interest rate (typically

between .25 and .50 percent) because the lender has its own

money at risk for longer (lenders know this very well

time is money You have to be so aware).

This higher rate, along with the additional ten years of the loan, results in the borrower paying 47% more in interest, or $55,000 more over the life of the loan. Even with a lower down payment that supposedly makes it more affordable to buy that home. Sounds like a good deal to the lender.

Another problem that the borrower faces is equity creation

more slowly at the beginning of the loan. The extra interest

the expense paid for the extended term of the loan impedes equity

to build quickly. All this for a monthly payment of only $35 less.

You need to think in terms of overall cost and not just monthly

payments The total cost is what you will get back to yours

creditors The focus on the monthly payment is striking

away from the total amount payable. You have to look

this with any debt, car payments, personal loans, credit cards – calculate the total cost, not just what you pay each month.

I’m sure you’ll start hearing more about these loans. Think long and hard before extending your debt. The goal is to be debt free and to do so as quickly as possible. Advise your families and friends to do the same.

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