How Is It Like to Tie the Knot with a 30-Year Mortgage?
July 12, 2017In Texas, you can choose various mortgage products including the 30-year mortgage, 15-year mortgage, 5-yr plan, 40 & the 50-yr schedule. The length of these mortgage plans varies according to interest rates and the loan amount. You may borrow the same amount for all these categories, but the interest rates will be different and so will be the amount you pay back to lenders.
When you visit the market to buy a mortgage, you usually, get two options i.e. Fixed price and Adjustable rate products. Furthermore, you get to choose between the jumbo loans and conventional loans. At the end, these products are divided into categories according to the loan length.
Interest rates are already at a historical low point so there is no benefit of choosing an adjustable rate. This article discusses the pros and cons of the 30-year mortgage because most people choose this program.
Baby Boomers Vs. Millennials
Baby boomers have always chosen the lengthy plans, but millennials are different.
The new generation does not like the traditional mortgage setup. They are looking for quick housing solutions. On opposite to that, a 30-year mortgage also imposes additional interest rates. It won’t be a surprise if your friend has paid more than $100k in interest rates for a 30-year plan. He wouldn’t have paid the same rates if he would have gone for a 15-year plan.
What is a 30-Year Mortgage Plan?
After the great recession of 2008, people were afraid to enter the real estate market. The economy was weak, home prices were down, so it was not a good time to purchase real estate. Because of this fear and economic conditions, consumers were not taking mortgage loans and banks were bearing the loss. To solve this issue, banks introduced the 30-year plan which was the longest period for any mortgage product.
During a 30-year period, you pay small loan installments. However, the problem is that you do not become the homeowner unless you have paid all loan installments. Many people only spend 9 years in their dream homes and they move on. Millennials are no exception. They will change at least 2 homes in their lifetime (the retirement property is not included).
Another problem with the 30-year mortgage is how you earn the equity in your home.
Earning Home Equity at a Glance:
30-Year Plan Vs. 15-Year Plan
Let’s calculate loan payments for a 15-year and 30-year mortgage plan respectively. For the sake of convenience, let’s take the median value of a single-family home in McAllen Texas which is $120,000. Without deducting the down payment, we will calculate the interest rates made on a mortgage of $120k. Furthermore, we will see the pattern of building equity in one’s property.
30-Year Plan
Amount: $120K
Interest Rates: 3.75%
Plan Terms: 30-Year Fixed
So, for this loan, you will pay $80k in interest rates. You will pay $556 as the monthly payment. This image from the website: http://www.amortization-calc.com/ shows how you pay interest rates & balance with a 3-decade plan.
Notice how you are paying more in interest rates and less in the balance. If you sell your home after 9 years, you would have paid $60,048 but your equity will be only $24,964.
Compare that to the 15-Year Plan
Let’s say you want to sell the home after 9 years of purchase. At the purchase, you will have $65,496 in equity and you would have paid $87,911 towards loan payment.
Conclusion:
In this comparison, the 15-year plan wins the game. In fact, in any game of economics, the shorter plan is always the winner because of 2 reasons:
- You pay low-interest rates on the short-length loan.
- You pay fewer interest rates on a shorter plan.
Experts agree that a thirty-year mortgage is not always the best choice. Consumers should consider interest rates, loan amount and how long they want to stay in the house before making the final choice.
Image Courtesy: http://www.amortization-calc.com/