Shorten the Term of My Loan
This is an area of refinancing that we are seeing a lot more these days. Unlike the trend 4-6 years ago when everybody was cashing out their equity we are now seeing a segment of the population that is doing a reversal.
A more responsible long term outlook is being taken on by many customers who wish to dramatically lower the amount of accumulated interest they will pay over time.
A typical example is a borrower who has a 30 year fixed with 23-27 years remaining. That borrower can squeeze into a 15 or 20 year fixed and save thousands of dollars! I actually have a customer right now who bought their home one year ago and he is taking his mortgage down from $399,000 at 5.125% to 399,000 at 4.125% on a 25 year term. Getting rid of those four years is going to save him approximately $150,000 in accumulated interest!
The difficult part about this loan is that the benefit comes at the end of the road. This same customer will have exactly the same mortgage payment going forward, it will just end 4 years sooner. Also a shorter term loan will allow you to watch your equity grow that much quicker.
Here is a good example: A cusromer has a loan of $250,000 taken out 5 years ago at 5.75%
Current market conditions can get him a 20 year fixed at 4.125%. His payment goes from $1458 to $1488 but he saves $100,000 in accumilated interest or if he chooses he can take out another 30 year fixed and send extra money every month. He still saves about $100,000 over the remainder of the loan. See attached: PDF of three amortization schedules
This is sort an after effect of the mortgage craze and I am happy to see it. The way to determine how much you will save is with amortization schedules. You look at your current loan, the future loan with the shortened term, or even a new 30 year fixed paying the exact same payment you are sending now. Interest rates are so amazing now, I have a feeling you will be pleasantly surprised.
One term that we don’t hear enough about is accumulated interest. Mortgages have huge amounts of accumulated interest because of the way the money is collected over the life of the loan. This is why banks love to offer mortgages to the public.
- A simple interest loan with collect the same percentage based on the face value of the note.
- A 30 year fixed mortgage will collect approximately 13 percent applied to principal in the beginning of a thirty year term. This creates a huge opportunity for profit for the bank. Thirteen percent is actually a very low number if you think about it.
- Imagine borrowing $100 from a friend and you agree to pay him back 5 dollars every month and your friend says that .65 cents will be used to lower the balance and he will keep the rest. You would probably no longer wish to call that guy your friend.
A new thirty year fixed currently has a rate of about 4.875% and 13% is applied to principal.
A new twenty year fixed currently has a rate of about 4.00% and 22% is applied to principal.
A new fifteen year fixed has a rate of about 3.375% and 53% is applied to principal.