Everyone has heard that statement before but how many of you have seen my picture. Not a picture of me, but a picture that hopefully will amaze you in a way that you will finally make the move to a shorter term mortgage. Enough said; take a look and see for you.
Now that you see it do you believe it? It is pretty obvious that any loan is pretty good up to the 20 year amortization but after that you are simply overpaying interest to keep a loan going that doesn’t need to continue. While the 10 year fixed is clearly the least expensive way to finance your house the, 15 and 20 year loans are good alternatives for those who cannot afford the 10 year payment. There simply isn’t a good reason to opt for the 30 year except for very specific reasons which do not apply to the average borrower.
The monthly payments on the various loans referenced above are $2192 for the 10 year, $1671 for the 15 year loan, $1429 for the 20 year and $1211 for the 30 year loan. A quick look at the value of each loan in relation to the 30 year is as follows: The 10 year pays off in 1/3 of the time of the 30 year loan but doesn’t cost even twice as much! The 15 year pays off twice as fast as the 30 year but only costs about 1/3 more. The 20 year loan takes only 2/3 of the time to finish but only costs 18% more than the 30 year on a monthly basis. All of these examples show that the value to the borrower is not in the 30 year loan, but in every other loan.
The question now is how do you get into a shorter amortizing loan if your budget is already stretched to the maximum? One of the ways is to break it down to a daily cost. It won’t be pennies but it also won’t be that many dollars to go from a 30 year to one of the other choices. To go to a 10 year it will cost about $33 a day more, a 15 year will be approximately $15 a day (more manageable) and a 20 year will be the easiest at $7.25 a day. If you can find those types of dollars in your budget then you can save yourself a fortune! Your savings without interest accumulating will be as follows:
10 year will save 20 years of payments of $1211 a month = $290,640
15 year will save 15 years of payments of $1211 a month = $217,980
20 year will save 10 years of payments of $1211 a month = $145,320
($1,211.00 is the 30 year monthly payment)
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.