While working on a file for a client today, he texted me to inquire about 15 and 20 year rates. He was interested in paying off his mortgage quickly and I've counseled many clients in using a variety of methods to pay off a mortgage in less time than what the mortgage note might be amortized at. I had previously mentioned to him that he could do a bi-weekly program, a mortgage accelerator program (as is done in Australia and often referred to as a Money Merge Account or Equity Accelerator) or simply choose a shorter term, like a 20 or 15 year mortgage AND employ the various techniques previously mentioned.
He was currently quoted on a 30 year fixed rate of 5.125% today and payment would be $1018.40 per month. But by having me do a loan comparison and offer a full mortgage analysis on his loan, the length of stay in his property and getting his overall goals and strategies he had in mind, it made sense that he should probably be in a 20 or 15 year mortgage, since the increase in payment was well within his comfort level and debt-to-income ratio.
A $152,000 Mortgage Loan Amount, with great credit (720+ FICO) and a debt-to-income ratio of 22% on the 15 year mortgage. Below is a comparison between the 3 loan terms over the first 60 months (5 years) into the loan:
- 15 Year at 4.75% Payment of $1396 PITI monthly, but he would have only $112,764 left on his mortgage VERSUS
- 20 Year at 5.125% Payment $1227 PITI, but he would have $127,133 left VERSUS
- 30 Year at 5.125% Payment of $1041 PITI, but with $139,825 balance left.
Yes, the payment difference is about $355 per month, but in his case, his last mortgage payment he had was about $1800 so he could more than afford it. So he decided that being further along in reducing his principal debt was worth the use of a 15 year mortgage. His main goal was that he wanted to have his debts, which include his mortgage, paid off before he was 50. He's 38 now, so if he employs even just a bi-weekly program to his new 15 year mortgage, he should be able to have it paid off in about 10-11 years, just about when he reaches 48.
So while rates shot up today + .5%, there was still a chance to lock in a fixed rate at 4.75% for a 15 year mortgage AND he's on track to reach one of his goals, while keeping a payment he's comfortable with. Not only that, but over the same 5 year period, the difference in principal amount left is about $27,061.
Could he be better off investing the $355 difference in payment? Possibly, but his comfort level knowing that real estate is overall a safe investment, even in times of values dropping, leads him to believe that over the long haul, investing in his home (and himself) is a better bet and payoff. Again, just his comfort level and his goals; everyone's is different, but I think if I had his position, I'd probably advise him into a 15 or 20 year mortgage versus a 30 year, because of the TENS of THOUSANDS in mortgage interest he'll be saving. Actually, that's exactly what I ended up advising him to do. :-)
For a complete mortgage analysis for purchasing a primary home, 2nd home/vacation home or investment properties, you can reach me at 1-800-862-0784 ext 21 or contact me through Activerain below.
Happy New Year - Have a Safe Time Ringing In 2009
