A 15 Year Loan May Not Be Such a Good Idea.

Real Estate Agent with Bill Cherry, Realtor 0124242

It interests me how many Realtors are suggesting new home buyers pick slightly lower interest rate home loans rather than those that those with 30-year amortization periods.

The rational is that the interest rate for 15-year loans is slightly less than that for those of longer periods.

And that the buyer will pay off his home up to twice as fast.

They claim the same is true for refinancing existing loans. 

Not only will the rate for the new loan be substantially lower than the old one, but it also gives the homeowners the opportunity to pick a loan that amortizes faster.

From a strictly financial-analytical sense, the logic is lousy. 

When mortgage interest rates are very cheap, as they are today, and the value of homes is seriously diminished and with no recovery of sizable consequence in the near future, there is a much better avenue.

Go with the 30-year loan and invest the difference in the payments each month into an appreciating asset, like a mutual fund.

Here’s an example:

          $200,000 @ 4% for 30 years = $   955 per month
          $200,000 @ 4% for 14 years = $1,479 per month

The average home buyer stays in his home for 7 years before he sells and relocates.  Assuming that’s true, at the end of 7 years, he would have invested $44,016 in his mutual fund account.  If his mutual fund’s share value only doubled in 7 years, he would have $88,000.

In 2019 the loan balance based on the 30 year loan would be $171,350.  So you would have accumulated $28,650 in equity plus $88,000 in mutual fund value, for a total of $116,650.

Had you done the straight 30 year loan for 30 years, at the end of the 7th year you would owe $120,292.  Your equity would be $79,780. 

That’s a difference of  $36,870 that, in this example, it would have cost you to do a 15 year loan rather than a 30 year loan, investing the difference.

Real Estate Broker
Dallas - Park Cities
Since 1964

214 503-8563


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Tony & Darcy Cannon
Aubrey and Associates Realty - Layton, UT
The C Team

Bill, That is an interesting way to look at it.  Nice post, and definately something to think about advising clients on!

Aug 08, 2012 05:00 AM #1
Myrl Jeffcoat
GreatWest Realty - Sacramento, CA
Greater Sacramento Real Estate Agent

Certainly with today's interest rates being as low as they are, the return on the money if invested wisely instead, could make a significant difference in wealth downwind.

Aug 11, 2012 04:13 AM #2
Myrl Jeffcoat
GreatWest Realty - Sacramento, CA
Greater Sacramento Real Estate Agent

I have another reason for liking 30 year loans, and that is should a homeowner lose a job for a certain number of months in the future, they might find it easier to budget should the housepayment be lower.  And if they had taken the extra money and invested in a mutual fund, as you suggest, they would have a nest egg too!

Aug 11, 2012 04:15 AM #3
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