Shortening Your Loan Term Can Save Thousands!
Examples included in article!
When is the last time you looked at how much interest you are paying over the life of your loan? Most people would answer “never” or “I don’t because I don’t even want to know” maybe followed by a slightly uncomfortable chuckle admitting that it’s actually an important number to be aware of. Although facing the total amount of interest paid over the whole life of a loan can be a rough wake up call, it is important to talk about and address whether you are better off with a shorter term or not. In this article we will talk about the benefits of a 20 year loan and give an example of potential savings by chopping 10 years off your term. You might be surprised!
Here are the top reasons why you may want to consider a 20 year loan option:
The interest rate can lower than the 30 year loan: Part of that is the function of math, meaning the rate has to be lower in order for borrowers to qualify for the refinance due to having 10 less years to accomplish the same feat of paying off the mortgage. The other part is the mortgage-backed security it’s tied to can be less costly than the 30 year options, even though the 30 year option is the majority of home loans. Example, on any given day the market may offer a 30 year loan at 3.0% but a 20 year loan at 2.75%. (Example below)
The monthly payment is more affordable than the shorter term 15 year loan: Frankly a lot of people don’t even know there is a 20 year loan term option available to them. A lot of homeowners think that rates fall into 1 of 2 categories: 30 year fixed, or 15 year fixed. A 20 year loan is rarely marketed, sold, or even discussed, unless you are somehow made aware of this option. And even though a 15 year loan is only 5 years shorter than a 20 year loan, the monthly payment can end up being substantial enough to make you think twice, or reconsider that 20 year option as a preferred solution. (In the example below the monthly payment on the 15 year loan is $624 more than the 20 year payment)
The lifetime interest paid is closer to the 15 year amount than the 30 year amount: Say you actually cannot make a 15 year term monthly payment, but you can make the 20 year. Beyond the total interest paid figures being closer to each other in years than they are to 30, the total interest paid in dollars is a huge reflection of that as well. (In the example below the 30 year interest paid would be $258,887 vs. the 20 year interest paid of $150,599 vs. the 15 year interest paid of $100,110 ) Simply put, going with a 20 year loan will save a homeowner $108,288 compared to settling for a 30 year loan.
Great for refinancing from a 30 to a 20 in the first 5-7 years of homeownership: Why? You have a refinance that is not resetting you into a new 30 year loan. You are also potentially chopping off long term interest by reducing the number of years remaining to pay off your home. Additionally, you can still choose pay even more monthly if you can and choose too (our mortgage accelerator calculator can help you see how much you can save each month by making additional monthly payments against your mortgage). This is particularly true when the rate market is declining or hovering around all time lows like we have in 2020 and 2021. You can lock in a low rate at the same time the function of that reduced term is saving you thousands of dollars in interest over the life of the loan.
Example: A family who has a $500,000 mortgage and can qualify for the 20 year term monthly payment would save $108,288 vs. sticking to the 30 year loan.
|Loan Amount||Term||Interest Rate||Monthly Payment||Total Interest||Savings|
Though this is just one example of how you can save thousands of dollars over the lifetime of your loan, there are other ways to chop off months and years of your term even if you’re stuck in a 30 year fixed and unable to refinance. An Additional $50, $100, $200 a month will dramatically reduce the total amount of interest you pay over the life of a loan. For those of you who are capable of making those 20 year monthly payments, have 20% equity, or more, in your home right now can see substantial long term savings without resetting a 30 year term on your prized home. Contact us to talk about how we can shape your savings by considering a shorter term mortgage.
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Rates & Fees Disclosure:
‡ The payment on a $300,000 30-year fixed-rate VA loan at 3.000% with a 80% loan-to-value ratio is $1,292.01 with 0 (zero) origination points due at closing. The annual percentage rate (APR) is 3.235%. Payment does not include tax and insurance premium impounds. The actual payment amount will be greater. By refinancing your existing loan, the total finance charges may be higher over the life of the loan. Some state and county maximum loan amount restrictions may apply. Appraisal fee of $600, Processing Fee of $895, Underwriting Fee of $795 included in APR calculations with borrower paying 0 (zero) loan origination points.
‡ Based on Mortgage Heroes internal data.
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