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How to Pick the Best Amortization Period for Your Mortgage

How to Pick the Best Amortization Period for Your Mortgage

Are you researching the perfect home for your family? Maybe you’ve already looked at dozens of homes for sale online and have a good understanding of what type of properties interest you. Good! Now it’s time to think about how to finance it!

Smart first time home buyers (and second-time buyers for that matter) can get started with a mortgage pre-approval. Pre-approvals are important for several reasons:

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  • You’ll save time by visiting/viewing homes that you can afford.
  • Real estate agents and sellers typically only want to work with pre-approved buyers.
  • Sellers will take your offer more seriously – any offer coming from you is viewed as legitimate.

One of the key questions that you will need to answer is: How long do you want to take to pay back the home loan? Do you want to pay if off fast and live debt-free or spread payments out? It all comes down to the amortization period.

The amortization period is simply the amount of time that it takes to pay off a mortgage. Currently, in the United States, the maximum amortization period that banks offer is 40 years (for government-backed mortgages like FHA loans and VA loans).

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How does my mortgage term affect my monthly payments?

Lenders offer more than one option. You have a wide array of choices. In fact, mortgage terms can be set as 5, 10, 15, 20, 30 all the way up to 40 years.

  • Longer amortization periods decrease the amount you’ll need to pay each month. That’s the good news. The bad news is that a longer loan amortization periods increase how much you’ll pay the bank in mortgage interest.
  • Shorter amortization periods cost the homeowners less. For two reasons. First, Banks offer lower interest rates for mortgages with shorter terms because the money they lend to you is tied up for a shorter period of time. Compressing a mortgage term into a shorter duration also means you’ll pay less interest.

What amortization period should I use?

Glad you asked. There are two ways to evaluate this decision.

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First, as mentioned above, longer terms mean you’ll have a lower mortgage payment. As payments are spread out, less is needed each month to meet your monthly mortgage obligation. And home affordability is based, in part, upon your monthly income (lenders make a calculation called a debt-to-income ratio) compared to your expected mortgage payment. Therefore, lower payments translate into a bigger home. That’s a very appealing option for young families.

Shorter amortization periods decrease how much you’ll pay in interest. You’ll pay off the home faster and save money (less interest). While a buyer would qualify for a smaller home should he or she chose a shorter term, saving money can be quite appealing. You’ll certainly have more cash to diversify and invest elsewhere.

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Make a decision based on your personal financial plan.

30-year mortgage terms are the most popular option. That’s because people love bigger homes; folks tend to choose more square footage above all else. Longer terms tend to be more forgiving for first-time homebuyers who want a bigger home to “grow into” with their family.

Conversely, people obsessed with saving money tend to choose shorter terms and smaller homes. Here’s another reason to choose a shorter term: if you are over 40 years old and want to retire debt-free, carrying a mortgage for 30 years will not make that possible. Older homebuyers may want to plan ahead and choose a 15-year or 20-year term.

Clearly, you should choose a mortgage term based on your preferences. It’s important to know the difference between a longer and shorter amortization period. Armed with an understanding of the tradeoffs, you’re in a better position to make a choice that matches your style; carefully draft your future goals to make the best selection based on the kind of financial future you envision.

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Last Updated on January 21, 2020

How to Develop a Millionaire Mindset in 6 Simple Steps

How to Develop a Millionaire Mindset in 6 Simple Steps

We all like to dream about being financially wealthy. For most people though, it remains a dream and nothing more. Why is that?

It’s because most people don’t set their mind to achieving that goal. They might not be happy in their current situation but they’re comfortable – and comfort is one of the biggest enemies of growth.

How do you go about developing that millionaire mindset? By following these simple steps:

1. Focus On What You Want – And Take It!

So many people are too timid to admit they want something and go for it. When there is something that you want to accomplish don’t think “I could never actually do that”, think “I could do that and I WILL do that”.

Millionaires play to win, not to avoid defeat.

This doesn’t mean to have to become a selfish jerk. What it means is becoming more assertive and honest with yourself. You don’t have to grab off other people. There is a big pot of unclaimed gold in the middle of the table — why shouldn’t you be the one to claim it? You deserve it!

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2. Become Goal-Orientated

It’s almost impossible to achieve anything if you don’t set firm goals. Only lottery winners become millionaires overnight. By setting yourself attainable goals, you will get there eventually. Don’t try to get rich quickly — get rich slowly.

Let’s take the idea of making your first million dollars and expand on what kind of goals you might set to get there. Let’s also say you’re starting at a break-even position – you’re making enough to get by with a few luxuries, but nothing more.

Your goal for the first year can be having $10,000 in the bank within a year. It won’t be easy but it is doable. Next, you need to figure out the steps you need to take to achieve that goal.

Always look at ways to make growth before cutbacks. With that in mind, you might want to see if you can negotiate a pay rise with your boss, or if there’s another job out there that will pay better. You might be comfortable in your old job but remember, comfort stunts growth.

You may also have other skills outside of your workplace that you can monetize to boost your bank balance. Maybe you can design websites for people, at a fee of course, or make alterations to clothes.

If this is still not enough to make the money you need to save $10,000 in a year, then it’s time to look at cutbacks. Do you have a bunch of old junk that someone else might love? Sell it! Do you really need to spend $10 on your lunch everyday when you could make your own for a fraction of the cost?

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If you are to become a millionaire, you need to start accumulating money.

Here’re some tips to help you: How to Become Goal Oriented and Achieve More in Life

3. Don’t Spend Your Money – Invest It

The reason you need to accumulate money is for step three. Millionaires tend to be frugal people, and that’s because they know the true value of money is in investing. Being your own boss goes hand-in-hand with becoming a millionaire. You’ll want to quit your regular job at some point.

Stop working for your money and make your money work for you.

Rather than buying yourself a new iPad, that $500 could be used to invest in the stock market. Find the right shares (more on that later), and that money could easily double within a year.

There’s not just the stock market — there’s also property, and your own education.

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4. Never Stop Learning

The best thing you can invest in is yourself.

Once most people leave the education system, they think their learning days are over. Well theirs might be, but yours shouldn’t be. Successful people continually learn and adapt.

Billionaire Warren Buffet estimates that he read at least 100 books on investing before he turned twenty. Most people never read another book after they’ve left school. Who would you rather be?

Learn everything you can about how economics works, how the stocks markets work, how they trend.

Learn new skills. If you have an interest in it, learn everything you can about it. You’d be surprised at how often, seemingly useless skills, can become extremely useful in the right situation.

Start developing the habit of learning continuously: How to Create a Habit of Continuous Learning for a Better You

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5. Think Big

While I advise to start off with small goals, you absolutely should have a big goal in mind. If you have a business idea, then that is your ultimate goal – to start that business and make a success of it. If you want to invest your way to millions of dollars and do little work other than research, then that is your big goal.

There is no shame in not achieving a big goal. If you run a business and aim to make $1 million profit in a year and “only” make $200,000, then you’re still significantly ahead of most people.

Aim for the stars, if you fail you’ll still be over the moon.

6. Enjoy the Attention

To be successful, you have to be willing to promote yourself and enjoy the attention to a certain extent. Now the attention doesn’t need to be on yourself, it could be on your brand, but attention definitely attracts money.

Never be embarrassed to get your name out there. That means finding a spotlight and being brave enough to step right up underneath it.

If you run a business, try contacting the local papers. You’d be surprised at how amenable they often are to running a story about you and your business, and it’s all free publicity.

Above all, remember: You control your own destiny. Push hard enough for anything and you’ll get it.

More About Thinking Smart

Featured photo credit: Austin Distel via unsplash.com

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