Would you rather have a $100,000 home paid for in 15 years with total interest payments around $52,000? Or would you rather take 30 years to pay for that same home and have total interest payments of $121,656 — more than you paid for the house?
Despite obvious advantages to taking out short-term loans, some banks report that very few homebuyers go for the shorter-term loans. Most people take the option of lower payments for a longer period of time in order to finance their home.
For a $100,000 loan at 6% interest, a 15-year loan’s monthly payment would be $846.86 for total payments of $151,894 including interest rate payments of $51,894. For a $100,000 loan at 6.25% interest for 30 years, monthly payments would be $615.72 for total payments of $221,656 including interest payments of $121,656.
Dawn Robbins, mortgage production manager Renasant Bank for Mississippi, said she doesn’t find the 15-year program is the choice very often any more.
Flexibility with smaller payments?
“Most borrowers can now go 30 years and have the flexibility of a smaller monthly payment that can sometimes serve as a safety net in the event of job loss or unexpected expenses,” Robbins said. “Most borrowers do ask about making additional principal payments and how this will effect their term.”
Hitting the principal
Another instrument is putting the mortgage payments on a bi-weekly rather than monthly draw. This can also save many thousands of dollars in interest. Robbins said while some lenders may not offer this payment plan when the loan is originated, many times a good lender can work with the borrower to find an investor that the loan can be sold to that would allow the borrower to deduct the payment from their bank account bi-weekly.
“There is typically a one-time charge for setting up a bi-weekly payment plan,” Robbins said. “By paying bi-weekly, the borrower will make 26 half payments (or 13 full payments). The extra payment goes to principal reduction and, of course as you reduce the principal, you reduce the total interest paid, which in turn shortens the length of time it takes to pay off the loan.”
Dr. Ken B. Cyree, interim dean of the School of Business at the University of Mississippi, said today many family’s budgets are squeezed so tight that even a couple hundred extra dollars a month toward the mortgage just may not be possible.
For example, if you borrow $150,000 at 5.5% interest for 30 years, payments are $851.68. If that is shortened to 15 years at 4.5% interest, the payments are $1,147.29.
“That is an increase in house payments of nearly $300 per month,” Cyree said. “Many people couldn’t afford that. But if you want to pay off the mortgage in half the time, if you want to have money and get out of debt, a 15-year mortgage may make sense.”
Movin’ on up
With interest rates lower, it may be tempting for some consumers to move up to a bigger house for the same mortgage payment. But it might create a better long-term financial situation to stay in the same house, refinance and shorten the payment terms, said Chris Burford, program director, Consumer Credit Counseling Service (CCCS), Jackson.
“In the long run, ask yourself is it more beneficial than buying a bigger house?” Burford said. “There is more to getting a bigger house than the house payment going up. Utility costs, upkeep, taxes and insurance are all higher, as well. Consumers really need to think of buying a house that is adequate for the family instead of from the standpoint of wanting to buy a much bigger house thinking it will appreciate in value faster.”
He recommends buying a home that serves the family’s needs, is affordable and enjoyable.
“Enjoy making a payment you can afford and having less stress,” Burford said.
Contact MBJ contributing writer Becky Gillette at firstname.lastname@example.org.