Construction Bargain Strategies
3-21. 15-Year mortgage saves more than half the value of your home in interest. - Electronic Edition
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I love this one. You can save 60% of the cost of your home in interest charges by signing up for a 15-year mortgage after you build. You know how the 30-year mortgage costs more than twice the value of your home over its life? (Depending on prevailing rates of interest). Well, the 15-year mortgage costs less than half as much in interest. According to bankrate.com, a 30-year mortgage of $200,000 costs you $1,136 a month (today’s lowest rate), or $408,960 over 30 years. A 15-year mortgage is $1,595 a month or $287,100 over 15 years. The interest on the 30-yr. is $208,960 and $87,100 on the 15-yr.
The problem is that most people calculate their construction budget against what they can afford for a monthly mortgage payment, and the 15-year loan is more per month; $400 to $500 more in the $200,000 example above. So for the “plan-ahead” O-B who can restrain his building appetite to allow for a shorter loan, this is an awesome benefit. People argue that you move every seven years on average, so who cares about a loan that they pay off anyway? Well, over a thirty-year period, most people lived the entire time under 30-year mortgages and pay all that extra interest in spite of themselves. The loans for 15 years are considered less risky than the longer ones, so the interest rate is about a point better. Elaine and I lucked out here. When rates went down recently, as they do every five years or so, we refinanced a 30-year loan to a 15-year one. The rate on our mortgage fell from 7 and 3/8 to 5 and a quarter percent. With that difference, the monthly payments worked out to nearly the same as before. Our amortization of principle increased from $185 a month to $525 a month for the new loan. That feels like an extra $340 a month in the bank to me. “Hidden” mortgage interest charges can spoil your owner-builder savings: "Traditional mortgages The most popular type of Home Loan is a fixed-rate mortgage. With this loan you have the same interest rate for the life of the loan. That means twenty years from now your payment will be the same as it is today. On fixed rate mortgages, you can choose to have a 15- or 30-year loan. The 15-year term has a lower interest rate and higher monthly payments. Another traditional loan is the adjustable rate mortgage (ARM). Here, your initial interest rate is lower than with a fixed rate loan; however your rate changes as interest rates fluctuate according to market conditions, so your mortgage payments could increase or decrease in the future. Because the initial payments are usually fixed for the first several years, ARMs are most appropriate for those who plan on selling before the interest rate changes or for those who have sufficient funds to handle possible higher payments. Specialty mortgages On some mortgages, payments can increase more than fifty percent when the introductory period ends. That means if you were paying $1,000 for your mortgage, you would be paying $1,500 if the payment increased 50 percent. That can create a real payment shock for borrowers. As home prices have increased, many buyers have tried to stretch their incomes by using specialty loans, including interest only, 40-year, negative amortization and option payment ARM mortgages. Although these types of loans are appropriate for some borrowers, they are not for everyone. These mortgages present a higher risk that you may not be able to afford the mortgage payment in the future. Watching out for predatory loans Along with understanding the different loan options, you need to be aware of lending practices that would strip you of your wealth. There are several signs you can watch for if you suspect predatory lending including high fees and excessive prepayment penalties. On competitive loans, fees below one percent of the loan amount are typical. On predatory loans, fees totaling more than five percent of the loan amount are common. Other signs to watch for are kickbacks to brokers, loan flipping, unnecessary products, mandatory arbitration, and steering and targeting, according to the Center for Responsible Lending.”
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