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The Race for Equity - Choosing the Right Loan Program

By
Industry Observer with Retired

The Race for Equity
Choosing the Right Loan Program


Those who take property ownership seriously often look for options to build equity at a faster pace. An aggressive approach is to select a 15-year loan program over a 30-year mortgage.

A 15-year loan works well for home buyers budgeting time and money, those who are possibly looking forward to a debt-free retirement, or those who plan to upgrade to a larger home within 15 years. But this requires a sincere commitment to making substantially larger monthly payments.

Provided the homeowner can afford the financial commitment of a 15-year loan, they will pay significantly less money in interest simply because the life of the loan is spread over a shorter period of time. This will result in a smaller tax deduction over a shorter period of time. However, they need to be aware that unless they are extremely financially secure, even a minor setback can have a tragic impact on their ability to make mortgage payments on time and in full. The bottom line is that it's probably not a good idea to put all available cash into a mortgage payment and lose any hope of a financial cushion in the event of emergency.

A less vulnerable approach is to consider making principal prepayments on a 30-year loan, or to invest the extra dollars into another type of asset accumulation account. Here the compelling question is, is it better to take the risk of a non-guaranteed investment, or bank on the guaranteed savings on mortgage interest?

Making prepayments on a 30-year loan is often deemed to be the safer route, and the borrower can make the extra payment when they want to, rather than through obligation. If the homeowner has made less than a 20% down payment, principal prepayment offers them the ability to have their loan reviewed by the lender for the purpose of removing any private mortgage insurance payment (PMI) earlier than expected. First, the borrower needs to discuss prepayment procedures with their lender, and take into consideration whether there is any prepayment penalty associated with their financing before initiating prepayments. They should also note that principal prepayment reduces mortgage interest, which is tax deductible. Depending on what their tax bracket is, this may or may not be beneficial to them.

If the extra money is invested in some other vehicle, the earnings will be reduced by taxes (unless the money goes into a tax-exempt fund). The borrower should compare the mortgage rate to the rate of return on another type of investment, and decide if it makes more sense on an after-tax basis to invest the extra money somewhere else and have the ability to liquidate those assets if necessary.

This article was provided by Paul McCausland at 1st  Mariner Mortgage in Maryland.  Paul@TheHomeLoanCenter.net

 

Iceland Poppy, Kentlands Spring Flowers IMG_7902

Photograph by Roy Kelley using a Canon PowerShot G11 camera.

Roy and Dolores Kelley Photographs

Posted by

Roy Kelley, Retired, Former Associate Broker, RE/MAX Realty Group

Gaithersburg, Maryland  

Comments (16)

Rob Thomas
Prestige Homes of The Tri Cities, Inc. CALL....423-341-6954 - Bristol, TN
Bristol TN-VA & Tri Cities Agent, ABR, GRI, e-Pro

Roy ....Great information as always ...It can really payoff (No Pun inteded) to add a liitle extra to go towards the principal each month!  Thanks!

Apr 11, 2012 08:58 PM
Wayne Martin
Wayne M Martin - Chicago, IL
Real Estate Broker - Retired

Roy, some people will never add extra to a 30 year loan and some disciplined people will and reduce the term to under 15 years. Discipline is the key and knowing the options is critical! Thanks!

Apr 11, 2012 09:37 PM
Anita Clark
Coldwell Banker Access Realty ~ 478.960.8055 - Warner Robins, GA
Realtor - Homes for Sale in Warner Robins GA

Roy: For those that can afford to shorten their mortgage period, paying less interest is always the best approach.

Apr 11, 2012 09:45 PM
John McCormack, CRS
Albuquerque Homes Realty - Albuquerque, NM
Honesty, Integrity, Results, Experienced. HIRE Me!

Good morning Roy,

I like the choice of paying more towards the principal each month.  Get the casa paid off and call it home sweet home!  Hope you and Ms. Dolores enjoy a grand day in all you do my friend.

The Q -Man

Apr 11, 2012 10:13 PM
Roy Kelley
Retired - Gaithersburg, MD

Good morning to all and thanks so much for your comments.  An added benefit of 15 year mortgage loans is that the interest rate is usually much lower than the rate for a 30 year loan.

This week, we were quoted a 3.25% rate for a 15 year mortgage loan, with no points, for 95% loan to value mortgages to $417,000.  The 30 year rate on the same product was 4% at this regional lender in Maryland.   

Apr 11, 2012 10:45 PM
Diane Daley
Caron's Gateway Real Estate - Northumberland, NH

I like a shorter period of time or biweeklys instead of traditional it really helps in the end. Good post

Apr 12, 2012 05:00 AM
Joshua Zargari
MJ Decorators Workshop LI staging and home decorating - Lynbrook, NY
MJ Decorators Workshop

Good afternoon Roy.

This is a great post. When I bought my home I took a fifteen year mortgage.

Apr 12, 2012 05:51 AM
Robert Bob Gilbert
Berkshire Hathaway HomeServices Anderson Properties - Katy, TX
Your Katy TX ( West of Houston) Real Estate Expert

Hi Roy,

You can turn our 30 year into a 15 year mortgage by making extra prinicipal payments each month and personally I like this much better as your 30 year payment is cheaper and if financial stress occurs you always revert to the lower 30 year payment amount.

Apr 12, 2012 06:03 AM
Tony & Darcy Cannon
Aubrey and Associates Realty - Layton, UT
The C Team

Roy, That is some good information!  I love the flower photo! 

Apr 12, 2012 08:29 AM
Roy Kelley
Retired - Gaithersburg, MD

Thanks to all for your comments.  Those that can afford the payments for a 15 year mortgage rather that a 30 year loan will have a lower interest rate for the entire mortgage period.  Take a look at the amount you will save.

Apr 12, 2012 10:33 PM
Roy Kelley
Retired - Gaithersburg, MD

It is sometimes a good practice to revisit old blogs and reblogs. We might even find some good ideas for current posts.

Apr 21, 2019 12:33 PM