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The 15 Year Mortgage – The Fast Track to Ownership (and Wealth)shem creek sunset

New home buyers have a wealth of choices to make before even coming close to sealing the deal at the closing table on a new home.  For many, the most important decision comes down to their method of finance.    A popular financing tool over the last several decades has been the 3o year fixed rate mortgage because of it’s lower monthly cost and low down payment.  The downside to this model for most homeowners is that  they have to wait many years into the loan before they begin to see any equity in their home, the difference between market value and what they owe on the mortgage.  In most cases, even though they are perceived to be affordable, these loans are counter-productive for the home buyer who wishes to see their efforts to buy a home actually yield some real value. That’s because in the first five to ten years of a 30 year loan, a huge percentage of your payments are used to pay the interest on the loan, not the principal.

The Debt Model vs The Ownership Model

The effect of the housing market collapse of 2008 and the subsequent conversation about home affordability should have provided an opportunity for new consumers looking to buy a home to learn about the fool’s gold known as the 30 year fixed rate mortgage.  The massive crisis should have re-enforced the need for consumers to make smarter financial decisions regarding their loan of choice.  Many home buyers today still favor the lower monthly payments of the 30 year loan, despite the fact that it is ultimately a devil’s bargain in which the borrower ends up paying the bank huge amounts of interest in the first ten years before even getting a whiff of equity.  In retrospect, this way of thinking and this kind of loan probably helped to devastate the wealth of many home buyers over the last decade and ultimately shock the nation’s economy into a corpse-like state for several years.  While it is easy to understand the short term attractiveness of a lower monthly payment, and it may truly be all one could afford, you have to question the wisdom of such a decision when you look at the amortization table for a 30 year loan.  Putting affordability aside for the moment, just take a look at the bottom line of each sample table, and you’ll notice that the interest paid is where the rubber meets the road.  Before you make the offer on that house be sure to ask this one important question:    do you really want to pay that much interest?  Even with lending rates still hovering around 4%, you should question whether any house is worth paying that much interest, when it is ultimately more like paying rent to a bank.    For some buyers in the last decade, it was clearly not worth it.  Depending on your personal circumstances, such as how long you plan to stay in the new house, you may  be better off renting, and there are calculators that can help you make that decision.

If you are sold on home ownership and move forward with a purchase,  the fifteen year loan is the far better deal for you and your money in the long run.  You can use a good mortgage calculator (see below) and run the numbers yourself with an always cautious eye focused on the total interest cost of the loan.  It should be mentioned that if the 30 year fixed mortgage is all one can qualify for, all is not lost.  By making extra payments, either monthly or yearly, marked toward the principal, it is possible to shave  a substantial number of years off the loan.

Comparison of 30 Year & 15 Year Mortgages Sample Amortization Schedules 

amortization table 30 year fixed rate

30 year fixed rate mortgage at 4% 

amortization-table-15-year-3percent

15 year mortgage at 3%

 

 

 

 

New Ideas Will Help Home Ownership

Fortunately, there are some new efforts underway to reshape how the mortgage interest game  is being played.  Efforts like those of Bruce Marks from Neighborhood Assistance Corporation of America and Edward Pinto from The American Enterprise Institute should be applauded.  Their work has resulted in a partnership between NACA and financial institutions like Bank of America to provide 15 year loans with the option to buy “points” that will allow you to further lower your interest rate.  The pilot program is called the 15-year Wealth Building Home Loan is now being offered through NACA.  There are some questions one should ask about this organization, such as the requirement of a yearly membership fee and their mention of paying “points”, which in truth should be considered like interest payments made in advance (at the closing table).  While 15 year loans and paying points have always been standard mortgage product, this appears to be something new.  The Wealth Building Home Loan is a 15-year mortgage with a fixed interest rate that can be bought down to almost zero. In addition, little or no down payment is required, there are no additional fees and underwriters will pay far more attention to your residual income than to your credit score.

If home ownership is in your future, this might be your best bet.

Here is a recent story on NPR about the “New” 15 Year Loan :

 

 

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