Many people are on auto-pilot when they get a mortgage and choose a 30 year fixed without understanding how much money it’s going to cost them without further planning. I’m not saying the 30 year fixed-rate mortgage (FRM) is bad, but you need to know what you’re getting into if you have one and there should be a specific strategy around it.
Bankers created the 30 year mortgage to make more money lending on people’s homes, but it also allowed more people to qualify for a mortgage as well. This increased the demand for financing and voila, a Bankers dream scenario. More people to make more money on. You see, in a 30 year FRM, almost no principle is paid in the first 7 years. So, if you plan to stay in a home for 5 years or less, then you’re basically renting with a mortgage deduction and no easy way out after the lease expiration.
For most people, it makes sense to get a 30 year FRM because of the flexibility involved, but very few people should have a Mortgage Strategy that calls for only paying the minimum payment on a 30 year loan. Paying extra amounts toward principle can make a HUGE difference in the amount of interest you pay and how quickly you pay off your home. Here is an example:
30 year fixed rate loan for $350,000.
Interest rate: 4%
Monthly payment: $1671 (principle & interest)
Total payout: $601,560
Interest paid: $251,560
If you paid $150 more per month, here’s what would happen:
– The loan would be paid off in less than 26 years, saving you 4+ years of making a mortgage payment.
– You would save $41,000+ in interest, which could be invested in your retirement account and accumulate to 6-figures worth of money over 30 years pretty easily.
If you paid $250 more per month, you save almost $62,000 in interest and cut that 30 year loan down to less than 24 years!
Don’t settle for auto-pilot on your mortgage, it will cost you way too much money! Be smarter than everyone else and put a Mortgage Strategy in place right away.
Other topics covered today:
– Today we just answered emails and talked about the dangerous 30 year FRM. Questions ranged from tax issues to short sales and bankruptcy.
Jon Jerotz, VP of Mortgage Lending with Guaranteed Rate and San Diego Mortgage Expert.