Long Term Mortgage Loan — How To Retire It Early, Part 1 of 2

Some of you may have already thought about, or even calculated, the real cost of getting a mortgage loan to finance your home purchase. If you did, that’s a good sign that you are savvy when it comes to your money. Keep that good habit alive.

The calculation is actually very simple and straight-forward. All you have to do is multiply the amount of monthly amortization by the total number of months – say, by 360 for a 30-year loan term – and that’s it. It’s no brainer, actually.

However, if you want to find out the total amount of money that goes to paying the interest, you need to use the Online Calculator which you can find at the Right Panel of this website or by following this link. With the help of that calculator, it’s easier to figure out how much of you payment is being swallowed by the interest payments.

(See also: Mortgage Loan Calculator.)

Long Term Home Financing and Its Effects

Did you notice that a long term loan of 20 to 30 years could literally cost three times, or even more, than the original amount that you borrowed? That is, if you borrowed P 1M and plan to pay it off in 30 years at 10% per annum interest rate, it will actually cost you roughly P 3M in combined interest and principal payments alone!

For some people, that is enough to spin their heads around and decide against ever using a long term loan. One site visitor was thinking along this line and left a comment this way:

“wow! now I see it’s better to buy a property in cash than finance through PAG-IBIG. The interest almost exceed the principal, you can even buy another house with that interest!”

Do you agree?

Well, actually he was right about the enormous amount of money at stake in the long term. But, let’s get real and think along this line:

“At your current level of income and lifestyle, how many years do you think it will take you to raise the amount of money equivalent to the selling price of the house that you wanted to buy?”

Let’s put a real figure this time, “How many years will it take you to save P 2M?” I’m assuming you are eyeing a house with a P 2M price tag. When answering that, you should consider the following:

• Your Income. Or your combined income if you are married
• Your Lifestyle. Is it high- or low-maintenance?
• Your Priorities. Make a list: your wedding, advanced education, job placement fee, etc – anything that costs money and that is important to you.
• Your Foundation. Think: the people who depended on you for financial support.
• Your Debts. Don’t ever forget this part before taking on another debt, your house.

How many years, then?

• 1 year? This is not impossible at all. But for most Filipinos, no matter how hard they work, are just not on that level yet.
• 3 years? Congratulations! You probably should aim for a higher priced home.
• 5 years? Congrats even more! Have you ever heard of the term inflation? Well, that’s a nasty word which means that the P 2M house you originally thought about buying should have already increased in price by that time.
• 10 years? Sigh… finally! But hey, are you still motivated about buying a home after the long wait?

You may want to disagree here, but if we get REALLY real, the sad answer to that question is FOREVER. Many people will reach their prime age without ever accumulating that amount in liquid asset – that is, in cold CASH. Hard to believe? Well, if the dead could only speak, they would all nod their heads in agreement. 🙂

Long Term Home Financing — The Beauty And The Beast, 2-In-1

The beauty of long term home financing is that it makes a financially-out-of-reach real estate appear light on the budget on a month-by-month basis.

Recently, I came across a real estate ad that says something like, “Own a home. Only 249 per day!”

That’s a brilliant Marketing Strategy and I bet it works. Thanks to Long Term Home Financing, owing a home gets even more affordable. That is, if you have the discipline to say goodbye to Starbucks.

But of course, a long term loan doesn’t always mean you have to pay off the loan to its last payment schedule. You can always retire it earlier than that. There are advantages and disadvantages in doing so.

In part two of this series, we’ll touch on the reasons for retiring your loan earlier than its maximum term. Plus, some tips on how to do it.

UPDATE: The second part of this article was already posted. Please check it now.

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“Long Term Mortgage Loan — How To Retire It Early” is written by Carlos Velasco. This is part one of a two-part series.