Things Your Real Estate Agent Might Not Tell You- Part 1

07 Jan 2014, Posted by Drew Russell in Real Estate Agency, Real Estate Finance

All to often I get a chance to work with buyers who become enthralled with a particular property and decide that they are going to purchase it, even if it slightly out their price range or budgetary comfort level.  Since the New Year is typically filled with financial resolutions, one of mine is to encourage more buyers of local real estate to pursue 15-year instead of 30-year mortgages. It is a tricky line to walk as an agent since many times my customers do not wish to divulge all their personal financial information to their broker.  However, good lenders and agents alike should take the time to talk to borrowers about the positives of a shorter term loan if the customer is open to it. So, one thing you may not hear your real estate agent say is, “Perhaps you should consider buying slightly less home and going with a 15 year mortgage instead of a 30 year mortgage.”

I have learned first hand about 30 year mortgages vs. 15 year mortgages.  After paying monthly payments for years and making little principal progress, I refinanced to a 15 year note only to find a lower rate, but that the principal and interest columns on the amortization schedule had flipped, and my payment only went up slightly while I jumped into the fast lane towards building equity in my home.  When purchasing real estate, those financing should be thinking more in terms of building equity and paying off the loan rather than simply what the monthly carrying cost is.

Let’s take a look at a quick example of a loan of $200,000 based at today’s rates.

Based on a 30 year loan at 4.5%, the payment for principal and interest would be $1,013 dollars.  In the first month, the principal owed would be reduced by roughly 250$ with roughly $750 going towards interest.  By the end of loan, if you pay all the payments in a 30 year period, you will have paid $364,000 and change for your 30 year loan!

Now let’s look at a 15 year loan…

Based on a 15 year loan at 3.5%, the payment for principal and interest would be $ 1429 per month. In the first month, the principal owed would be reduced by roughly $846 dollars with only $583 going towards interest! By the end of the loan, if you pay all the payments in a 15 year period, you will have paid $257,000 and change for your loan.

So, by buying less house, or forking over just a little bit more per month, you will save over $100,000 in interest and be debt free 15 years sooner!! When buying your next home, I highly recommend evaluating a 15 year mortgage as a financing option. It forces you to make better choices with your budget and puts you on the fast track to a mortgage burning party!

  • Alex Krumm

    Good advice, Drew! Most lenders will also allow bi-weekly payment schedules on 30-year fixed mortgages which will keep your payment roughly the same (1/2 a payment due every two weeks instead of 1 full payment every month), allowing the borrower to effectively make one extra payment a year painlessly and cutting around 7 years off the term of the mortgage.

    • Drew Russell

      Great comment Alex! Yes, that is the simplest way to accelerate your mortgage prepayment without making a significant financial change in monthly payment. I will do you one better, and you make bi-weekly payments on a 15 year mortgage and be debt free in 13 years! The spirit of either idea is the same- building wealth through equity and paying less of your hard earned dollars towards interest.