Vince Lombardi, the legendary coach of the Green Bay Packers, was once asked about how important winning is to him. He said "winning isn't everything, it's the only thing!" That is exactly how I feel about the residential, owner occupied home mortgage. It is the most important financial decision you most likely will ever make in your lifetime. And guess what -- most people do what their Realtor suggests, barber suggests, or aunt or uncle points out. Not that any of these people aren't qualified to give financial advice, they just do not take the time to understand YOUR financial condition. What happens next is the beginning of a financial loss that need not happen.
Most purchasers of a new house know about 30-year loans, and a good majority of them know about 15 year fixed loans, but very few know about a 20-year loan. That is a financial tragedy! Let's compare and contrast a 30-year and a 20-year loan on an amount of $325,000:
|Monthly Payment:||$1,969 (@ 6.125%)||$2,323 (@ 6.00%)||$354/mo.|
|Balance after 5 years:||$303,190||$276,724||$21,240|
|Balance after 10 years:||$273,316||$210,844||$42,480|
|Balance after 20 years:||$177,653||$ 0||$84,960|
A small difference in a monthly payment over time becomes an exceptional amount of money. While the payment may have been a bit tight at the beginning, most borrowers grow into the payment over the term of the loan and are generally quite capable of making the monthly payment with ease. Add to the above picture the reality that after 20 years, the borrower has $2,323 a month that he or she may use to invest for ten years before the 30-year borrower is even done making payments!
The sum of the money that is available over the next ten years is a staggering two hundred and seventy eight thousand six hundred dollars ($278,600).
ALL THIS IS AVAILABLE FOR THE RIGHT DECISION TO SPEND $354 A MONTH!
I know -- you are thinking no one stays in their house or their mortgage for 20 or 30 years anymore. Let me say that although the majority does not, a growing percentage does. But it doesn't matter if you move on, as long as you keep the program going. It will work out for you.
How important is the right mortgage? You can answer that question. Is this the only case that can create such a money deferential? Hardly! I can go on for days with amazing stories that point out how proper decision-making can yield huge profits. Instead, I will give you one of my borrower’s stories:
A gentleman had an $88,000 mortgage, which was a 30 year fixed @ 5.9% with 26 years to go, a $22,000 401(k) loan and $6,500 in credit cards. He was paying a total of $1,500 a month.
He had a great number of options that would all save him years of payments and yield a nice monthly savings. In every case, it would free up his loan against his 401(k), which he probably shouldn't have taken out, but instead pulled the cash out of his house. Here were the options:
? 20 year fixed at $844/mo. Save 6 years on the mortgage, totaling $38,880, and $656/month for 20 years (or $157,440).
? 15 year fixed at $986/mo. Save 11 years on the mortgage, totaling $71,133, and $514/month for 20 years (or $123,360).
? 10 year fixed $1,293/mo. Save 16 years on the mortgage, totaling $103,296, and $207/month for 20 years (or $51,120).
The equation isn't complete until you calculate what happens after the mortgage has been paid off and the monthly payment is now invested. A proper refinance at the right time corrects the errors that are made along the way.
Work the numbers; do not let the numbers work you. Spend your time on the one financial obligation that can make the biggest difference in your life, your home mortgage. Don't look back at the errors, we all made them. Look ahead to the opportunities that you can take advantage of to create the financial goals that are achievable without a struggle, just better advice and better planning.
Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom. Roger is the President and founder of Manhattan West Mortgage.