Terms vs. Rates: Extending your loan agreement for more years because it will lower your monthly payment may be more costly than you imagined. Suppose that you wanted to borrow money to fix up your home. You decide that a second mortgage is an acceptable route. You settle on $80,000 as the amount you will need. Let’s look at some of the options that you have to choose from.
$80,000 amount of the loan  5% annual percentage rate
Term

Monthly Pymt

$ Interest Paid

Total Payback

15 years

$632.63

$33,874.73

$113,874.73

20 years

$527.96

$46,712.24

$126,712.24

30 years

$429.46

$74,603.23

$154,603.23


$80,000 amount of the loan—6.5% annual percentage rate
Term

Monthly Pymt

$ Interest Paid

Total Payback

15 years

$696.89

$45,439.01

$125,439.01

20 years

$596.46

$64,149.66

$143,149.66

30 years

$505.65

$102,039.00

$182,039.00


Obviously the interest rate makes a difference. The larger the loan the more impact you will see within the monthly payments. But lets not forget the term. There is a huge difference in the amount of interest paid between these terms. It is always wise to take the shortest term you can possibly afford. This is true of mortgage, auto, and personal loans. Ask to see the full disclosure of how much you will repay, before you decide to take the loan.
Does paying extra on my mortgage really do anything? Let’s use the loan figures from our last examples. Suppose you decide to take the $80,000 loan at 5% for 20 years. Your monthly payment is $527.96. You also decide that you will add $5.00 to every payment until the loan is paid off. $5.00 doesn’t seem like a lot but here is what it does. You will have your loan repaid in 237 months instead of 240. That is 4 payments @ $527.96 each ($2111.84) plus you will have saved $843.00 in interest. That is a total savings of $2954.84. Everyone can find a way to pay $5.00 extra each month. How many coffees or fast food trips would you have to give up?
