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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 March 4, 2019

How to Use Credit Cards While Staying Out of Debt

How to Use Credit Cards While Staying Out of Debt

Many people will suggest that the best thing to do with your credit cards during these tough economic times is to cut them up with a pair of scissors. Indeed, if you are already in huge debt, you probably should stop using them and begin a payback strategy immediately. However, if you are not currently in trouble with your credit cards, there are wise ways to use them.

I happen to really love my credit cards so I will share with you my approach to how I use mine without getting into deep financial trouble.

Ever since about 1983 when I got my first Visa card, I continue to charge as many of my purchases as possible on credit. Everything from gas, groceries and monthly payments for services like my cable and home security monitoring are charged on credit. Despite my heavy usage, I have maintained the joy of never paying any interest fees at all on any of my credit cards.

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Here are some tips on how best to use your credit cards without falling into the trap of paying those nasty double-digit interest fees.

Do Not Treat Credit Cards as Your Funding Sources

Too many people treat their credit cards as funding sources for major purchases. Do not do this if you want to stay out of trouble. I use my credit cards as convenient financial instruments so I do not have to carry around much cash. In fact, I hate carrying cash, especially coins. When you buy things on credit, the purchases are clean and you will not get annoying coins back as change.

I do not rely on my Visa, MasterCard or American Express to fund any of my purchases, large or small. This brings me to my golden rule when it comes to whether I will pull out any of my credit cards either at a retail or online store.

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I never purchase anything with my credit cards if I do not have the actual cash on hand in my bank account.

If I really cannot pay for the item or service with cash that I already have at the bank, then I simply will not make the purchase. Remember, my credit cards are not used as funding sources. They are just convenient alternatives to actual cash in my pocket.

Make Sure to Always Pay Off Balances in Full Each Month

The next very important part of my overall strategy is to make absolutely sure that I pay the balances in full each and every month no matter how large they are. This should never be a problem if the cash has been budgeted for my purchases and secured in the bank. I have always paid my full balances each month ever since my very first credit card and this is why I never pay interest charges.

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Using Credit Cards with Rewards

Most of my credit cards are of the “no annual fees” type, including one MasterCard on a separate account I keep at home as a spare in case I lose my wallet or incur any fraudulent charges. However, I do use a main Visa card which does have an annual fee because all purchases on that card reward me with airline frequent flyer points. For me, the annual fee is worth it since I do travel and I get enough points to redeem many free flights.

You have to decide for yourself if you will charge enough purchases on credit each year without paying interest charges to warrant a credit card that rewards you with airline points (or other rewards). In my case, the answer is “yes” but that might not be the case for you.

I occasionally use a MasterCard or American Express card on small purchases just to keep those accounts active. Also, I have been to the odd retailer that accepted only a certain type of credit card, so I find that having one from each major company is quite handy. Aside from my main Visa card which earns the airline points, the rest of my cards are of the “no annual fees” variety.

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So this is how I use my credit cards without getting into any financial trouble with them. This strategy is recommended only if you are not in debt, of course. In fact, it is worth keeping in mind once you’re out of debt so that you can keep your credit cards active and treat them responsibly.

What are your credit card usage strategies? Let me know in the comments — I’d love to hear what methods you use.

Featured photo credit: Artem Bali via unsplash.com

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