The following is a guest post from my dear friend Susan.
So, I went to the loan officer at the bank and asked if we could find a way to raise my mortgage payment. No, I have not lost my mind. It’s a long story that starts with my bedtime stories as a tot, some of them actually ended with the phrase “And that is why the bank is never your friend.” I will fast forward for you a bit.
This particular chapter of my banking history started with closing on my first house the day after Thanksgiving 2008. Remember the fall of 2008? (cue dreamy music) The credit markets were frozen, the state fund for new home buyers was out of money and there was no free 8 grand for buying a house. Just me, a credit score and a 3 bedroom ranch. My interest rate was 6.75%. I moved in and interest rates plummeted. I refinanced last summer to a 30 year fixed with a 5.25% rate. I was happy and making extra payments on the principle. This spring interest rates fell again to ALL TIME LOWS! or so the signs said. Grrrrr. Can’t I win?
I was grouching at my brother (who deals with finances all day) about the whole thing. He recommended I look at a 15 year instead of a 30 year. As a big sister does, I told him he was nuts and that would never work as I am just a lowly teacher for goodness sake, I am not made of money. And, as a classic younger brother, he got out his calculator to check. Yup, he was right, I could.
I went off to the bank and had the lady in the suit do the math. I currently had a monthly payment of $481. Making that payment I would have paid $81,226 in interest over the life of a 30 year loan. I was approved for a 15 year fixed at the rate of 4.375% with a monthly payment of $648. Yes, that is nearly $170 a month higher but here is the kicker……. I will pay $31, 279 in interest over the life of the loan.
I have a feeling that someone out there is finding flaws in my math and I will admit I am looking at apples and oranges. The only thing that is the same between the two loans is the principle. However, since I can afford the higher payment now to save what could have been $50,000 in interest payments I am thrilled. Oh, wait, make that $49,000 as I have to pay to have the place appraised (again) and pay for the closing costs (again). Dear old Dad was right, the bank isn’t my friend. But, I think we may be able to come to an uneasy understanding.
Be sure to check out other great posts from Guest Blogger Susan.
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{ 4 comments }
I’m doing the same thing! I bought my home in the spring of 2002. We recently paid it off and are looking for something larger in a better neighborhood (where gunshots DON’T ring out at all hours of the day).
I’m a measly teacher too, and my husband does not work so that he can be a stay-at-home dad. I figure that a 15 year mortgage (at 3.95% I might add!) will be a little tight, but once we get our house sold, and all that money goes to the bank toward the new house, the mortgage payment won’t be bad at all! We can probably have it paid off in a few years :)
Every mortgage I know of allows you to prepay principal. My DH and I are paying $1100 extra every month and will have our 30 yr mortgage paid off in 10 years. But we did not want to lock ourselves into a higher payment with a 15 year mortgage in case one of us lost a job or got sick or whatever.
You could get a 30 year and then ask the mortgage company to give you an amortization schedule for 15 years. You would pay the mortage off in 15 years, like Jill said, but if an emergency comes up you wouldn’t be locked into a way higher payment.
Hi Jill and Erica! You are both right. Because of the S and L crisis of the 80′s banks are now forbidden to charge you a penalty for prepayment. (Although they make it sound like they are just being nice, not friendly behavior in my book) So, yes, I could just make payments on the principal and keep the longer, higher rate loan. However, since the higher payments of the shorter loan aren’t problem and I can still afford to pay additionally on the principal this works better for me. I also had my brother do the fancy math and even with the refi charges, I come out ahead on the 15 year.
Everyone has a different level of risk and different personal needs. I wrote this piece to let readers know that they should make sure they look at different lenght of fixed rate loans before they make a final decision for themselves. Before this I would have never though of going for any length of time less than 30.
Thanks for the comments! Susan
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