Saturday, May 12, 2007

15 year mortgages - a great deal!


I am a firm believer in the 15 year mortgage. Our family income was somewhat limited when we purchased our house, so we went with a 30 year fixed. Should we have waited? Possibly, but that's water under the bridge. We did buy a house that we could afford, so I consider that a success.

Here is a brief article touting the benefits of the 15 year loan verses the traditional 30 year. The principle is quite simple, the shorter your loan, the less interest you will pay. In the case of a mortgage (or any other loan for that matter), compound interest works against you.

You can use an amortization calculator such at this one to input your own numbers and compare. Basically on a $100,000 mortgage you can save around $66,861 in interest with a 15 year. But what if you already have a 30 year? The article doesn't say, but you have two options.

First, you can refinance. If you have excellent credit, great debt-income ratio, and a long stable income (job) this might be the best bet. You can refinance your loan into a 15 year and accept a slightly higher monthly payment with a little shopping, paperwork, and cash up front (for all that is holy, do not take out any cash from your equity). The best thing to do is save up for your closing costs, but usually people roll those costs into the principle.

Refinancing:


  • One fixed monthly payment
  • Must have good credit to refinance
  • Can possibly get a lower rate with a 15 year loan
  • It costs money to refinance


If a few things don't look right to you, for example your credit is not so good...never fear, you can still take advantage of a 15 year loan and pay only a little bit more in interest. If you are in debt (hence bad credit) stop now. All your excess funds should be going to pay off that debt. Out of debt but still rebuilding credit? Good job, you can simply use an amortization prepayment calculator like the one here and pay an extra check to the bank every month. You don't have to do anything to your existing loan, it costs you absolutely nothing (except the extra payment - but that's all to the principle!) and in the case of the $100,000 loan from the About article, you only pay around $3,000 extra total interest by doing it yourself even at your existing rate - assuming you started from month 1, run your own numbers to determine whether the savings would be substantial enough to consider refinancing.

Prepayment:

  • No cost to do it
  • Bad credit okay!
  • Needs good financial discipline, write 2 checks a month
  • Not an option for anyone in debt


You can get started right now. Calculate what it would take to finish off your loan in 15 years using the second calculator I gave you starting at whatever month you are in your mortgage now and write a check with "APPLY TO PRINCIPLE" in the memo to your mortgage company for the necessary amount. Wouldn't it be great to own your home in 15 years?

And wouldn't that mortgage payment look great earning 5-8% interest for you instead of going to the bank?

1 comment:

MoleOnABull said...

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