When a borrower looks into procuring a new debt, there are a number of factors to consider. One of the biggest is the length or term of the debt. This can range from mere days to decades. Long-term debt is considered to be debts that range in length from 10 to 50 years. Most long-term debts that the average borrower purchases are mortgages.
Interest Expense
Over the life of a long term debt, a borrower incurs a great interest expense over and beyond the balance of the loan itself. Even loans with a low interest rate incur a great expense. Consider this, if a borrower purchases a $100,000 loan at 5 percent, he pays $42,342.85 in interest on a 15 year debt. If the debt is amortized over 30 years, that interest expense increases to $93,255.78. The longer the term of the debt, the more interest that is paid over the life of the loan.
Slow Increases in Equity
In most cases, a borrower makes a principle and interest payment on his debt. In the first few years of a long term debt, a majority of the payment goes towards interest and the principle is reduced by a very small amount. Therefore, the amount of time it takes to build up equity in the asset is greatly lengthened by the term of the loan. The longer the term of the loan, the longer it takes the borrower to build up equity in the asset.
Closing Costs
A mortgage or a mortgage refinance is the most common long-term debt. The closing costs associated with this type of debt are quite high, considering the cost of most short-term debt averages a couple hundred dollars. The average closing costs associated with a mortgage are 3 to 6 percent of the loan amount, according to the Federal Reserve. This makes this type of long-term debt even more expensive than other, shorter term debts.
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