30 Year vs. 15 Year

Simply put, you will save Tens of Thousands of dollars in Interest and cut your loan term in half. 

If you are 40 years of age and take out a new 30-year mortgage, you will be 70 when it’s paid off.  Which means that you will still be paying a mortgage for another 4-7 years after you retire.

Taking a 15-year mortgage will increase your mortgage payment since you will be paying off your principal over a much shorter period.  To keep the same mortgage payment as you are paying now with your 30-year term, the rule of thumb is to be able to lower your interest rate by 3%, which is pretty difficult to do if the market has remained steady.  However, you can pay points to lower the rate further.  Each point equals 1% of the mortgage amount and will reduce the rate by approximately ¼% for each point paid.

Example:  The zero point option is 7% (not an accurate rate), to lower your rate to 6% (which will reduce your payment) you will have to pay 3-4 points. 

Is paying points in your best interest?   The answer comes in one question.  Will you be living in the home past the break even period?  If you will finance $200,000 at 7% for 15 years, your payment will be $1797.  However, if you pay “2” points and lower your rate to 6.375%, your 15-year payment would be $1728.  That’s a savings of $69.00 per month.  However, it would cost you $4000 in points.  So, doing the math, this would equal a break-even point of 57 months or 4.8 years.  If you will stay in the home for more than 4.8 years, then every month after that point you will be saving $69.00.  The total savings would be $8362.  After you deduct the initial $4000 investment (which you would finance into the loan), you would net $4362.00.  So, if you were a dollars and sense (spelled correctly) person, it would pay to invest in points.  However, if you will not live in the property for more than 4.8 years, you might look into less points or a zero point option.

I hope this letter served as a basic education in a Rate & Term Refinance.  Should you have any questions or would like to begin the steps to save tens of thousands of dollars, please call me at 1-800-817-8743

Dan Palumbo, Licensed Mortgage Banker

Dan is the published author of the Mortgage Loan Officer Training Manual.  You may order one by visiting www.mortgagetrainingmanual.com

Licensed Mortgage Banker - New Jersey Department of Banking and Insurance; Licensed by the Pennsylvania Department of Banking; Virginia Licensed Mortgage Lender