Fact: A 30 year loan at 3.625% for $300,000 has a fixed payment of $1368.
The 1st payment is made up of $906 interest (66%) and $462 principal (34%).
1. It will take 10.5 years before the above equation will have $684 principal and
$684 interest. Compare that with a 20 year loan which has 50.4% interest
and 49.6% principal as the makeup of the first payment. It will only take 4 months
to be equal. The 15 and 10 year fixed loans are even better than that.
2. If you do not get any benefit from the interest on the 30 year you are wasting
about $80,000 in interest which is 26.6% of the loan. Check with your tax adviser
and see how well you would do with the standard deduction instead of itemizing
using your home loan interest and real estate taxes. You might be surprised at
the outcome.
3. If you purchased the house with 10% down you will have mortgage insurance for
at least 5 years before you reach 80% loan to value. This will cause you more
expense that doesn't benefit you financially.
4. If Congress takes away the home mortgage deduction you will pay an amazing
amount of non taxable interest which be similar to rent on your own house
because it has no financial value. The total interest on this loan is $192.000
over the 30 years.
5. If you were to take a 15 year loan the total interest will be $69,700 and will free
your payment after 15 years. You then could make the payment to yourself and
save $369,700 plus interest. You would be worth twice as much as someone
who stays with the 30 year from start to finish.
6. You will pay off a 10 year fixed, a 15 year fixed and 90% of a 20 year fixed before
you payoff 1/2 of the 30 year fixed.
7. If you are looking to build your net worth the 30 year loan will take 11 years to
payoff 25% of the loan. This will leave the building of net worth primarily
to appreciation and will also keep you vulnerable to a down turn in real estate
prices.
8. The 30 year fixed is the highest interest rate of all the fixed loans, always!
It is currently 3/4% higher than a 15 year fixed.
9. Doubling up on payments on a 30 year loan will help pay it off faster. The amount of
interest you pay will still be more than any other fixed loan.
10. You will not be a "rock star" at a cocktail party because many people either haven't
a mortgage or have shorter term mortgages at lower rates.
It is time to stop the normal pattern of everyone taking a 30 year fixed. Even with the above reasons, however, it will not be easy. There are a few reasons why most people haven't even considered other loan types and they are as follows:
A. 90% or more of all mortgage advertising is on the 30 year fixed. It isn't about the 30 year fixed it is really about
the lender that is offering the loan and why they should be your lender of choice.
B. Because all of the family of almost every borrower has only had a 30 year fixed, except for maybe the cousins that nobody talks with, it would almost be sacrilegious to take another type of loan.
C.Finally, I am going to let the cat out of the bag. A large majority of borrowers for any type of loan only consider the monthly payment, not the financial outcome of their decision. If they did
the 30 year loan would most likely be extinct. Hopefully the 10 reasons will start a movement
toward the extinction of this loan.