Did you know that choosing a 15yr loan over a 30yr loan can save you $100,000 in interest even if the rate were exactly the same on either loan?
Example:
250K Loan @ 5% for 30yrs = 1342.05 PI (1342.05x360payments) = $483,138
250K Loan @ 5% for 15yrs = 1976.98 PI (1976.98x180payments) = $355,856
In this case, the 15 year shorter term mortgage saves that borrower $127,281
I'll explain later why it can be done NOW at much less of an increase....
Very few people understand how compound interest works. You are paying interest each month on the remaining balance of the loan. So, the amount that is paid towards the principal each month lessens the total interest paid each preceding month. Since the payment stays the same, you have a higher ratio of principal to interest the further the balance is reduced over time.
Most homeowners are solely concerned with keeping a "cheaper" monthly payment and are fixated on the interest rate itself. My sales manager used to say "you can't take your interest rate to the grocery store to buy bread, can you?"
That quote is everything wrong with mortgage financing. Everyone makes decisions for the wrong reasons. Homeowners prefer to keep the cheaper payments so they can allocate the money for other expenses. Their investment advisor tells them to keep longer terms so that they can fatten up the ole portfolio balance. Mortgage brokers don't want to bring it up because they know homeowners are programed to take the payment in the opposite direction.
The conversation almost always goes: Well yea, I'd love to go to a shorter term as long as the payment is about the same (This never works out BTW).
Mortgage interest should be like the plague for those who have the budget to shorten their term. Nobody, who can afford it, should finance for 30 years given the difference you pay just to save a couple hundred every month.
Right now, there is good reason to go 15yrs. It's been reported by Freddie Mac that there is a greater margin between 30yr and 15yr rates. Instead of the average .5% reduction, lender are putting short term rates on CLEARANCE and we are seeing record discounts of up to .80% in the rate.
A 4.25% 30yr rate is now 3.5% 15yr rate. Which reduces the amount that you must increase your monthly payment in order to shorten the term.
On the above scenario 250K Loan @ 3.5% 15yr the payment = $1787.20 PI
So the savings on the above mentioned scenario would result in Life of the Loan interest savings of $161,478 on a loan of ONLY 250,000.
If you can afford higher payments, PLEASE consider saving some interest by shortening your mortgage term. Paying the house off will also prepare you for retirement by increasing your monthly cash-flow. And if you haven't set aside enough money by age 62 to retire or the Federal Government increases the age of retirement, you can take out a reverse mortgage that pays YOU money every month for the rest of your life.
Life is great without a car payment. Imagine what it would be like without a house payment! Or even an extra 161,000 more CASH over 30 years in saved interest. Just my .02 for those who can afford to do it but choose not to.
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