How Much Does My Home Loan Cost?

by Erika Torres
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A loan can seem like a shortcut to your dreams, a way to make the distant future attainable now, but the expense involved makes taking out a loan a decision to be made carefully and with much consideration.

A home loan is an extremely long-term commitment that can last the majority of an average person’s working life and even extend into retirement if the balance remains unsatisfied. This makes determining the average price of home financing critical when weighing its benefits against its drawbacks. It’s always worth doing your research before committing to anything, you may be eligible for a Homestart first home owners grant.

Amortization

To understand how a home loan can become so expensive, it is important to understand the concept of amortization as it relates to repaying a home loan. Amortization is the gradual reduction in both the principal amount and interest involved with a debt over a given period, and it helps to explain why making minimum payments on a loan is so ineffective and may even expose an otherwise committed homeowner to foreclosure.

Minimum payment amounts are predetermined by a lender to address as much interest and as little principal as possible, and so while it may seem that a debt is being constantly paid off, the limited amortization it delivers increases the total amount of interest paid over the life of the loan as well as extending the life of the loan by retaining much of the original balance.

This is why precious little equity is built in the first years of a mortgage…in fact, over 80 percent of payment amounts in the first year are dedicated to interest alone.

How Much Will I Pay?

With an average loan amount of approximately $280,000 and interest rates hovering around 3.5 percent, homeowners can expect to pay about $1,260 monthly over the life of a standard 30-year mortgage. Over the life of the loan, this totals an estimated $172,640, and this figure assumes there are no penalties or late payment fees assessed at any point.

Combine this number with the $280,000 principal of an average loan, and the typical repayment on a 30-year home loan is well over $450,000 when making the minimum suggested payments. When considering these factors, it’s easy to see why so many homeowners struggle to keep up.

A home loan is one potential avenue to homeownership, but it is far from a universal solution. The level of commitment and expense involved with maintaining a long term home financing arrangement make seeking out a loan a serious pursuit with far-reaching implications and serious potential consequences.

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