By Mike Miles
Most home loans originated are 30-year term mortgage notes. It’s sort of the default amortization period when people think of getting a new home loan. However, in a rising rate environment … it is a good idea to consider a shorter term. Why? It saves thousands in interest. While it’s true that shorter terms result in more aggressive payments compared to a 30-year term, you may be surprised at how close the gap actually may be between them.
For the example let’s consider a loan amount of $225,000 on a home valued at $285,000 so there will be no mortgage insurance. Rates below are examples.
30-year note at a rate of 4.875%:
- Principle and interest payment of $1,191
- Total payments of the entire term equals $428,760
- Total interest paid is $203,760
25-year note at a rate of 4.875%:
- Principle and interest payment of $1,299
- Total payments of the entire term equals $389,700
- Total interest paid is $164,698 (saves about $39,000 in interest)
20-year note at a rate of 4.5%:
- Principle and interest payment of $1,423
- Total payments of the entire term equals $341,520
- Total interest paid is $116,520 (saves about $87,000 in interest)
15-year note at a rate of 3.99%:
- Principle and interest payment of $1,663
- Total payments of the entire term equals $299,340
- Total interest paid is $74,340 (saves bout $130,000 in interest)
The power of interest rates is significant as demonstrated here. The most underrated loan term utilized is the 25-year term. In exchange for $100 payment difference, there is nearly $40,000 saved over the life of the loan.
Every borrower has a different need, ,goal and situation. I encourage you to contact me to learn more about how today’s rates can help achieve your goals and fit your needs. With interest rates gradually increasing, it can pay to break the norm and take advantage of shorter terms.
This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.
Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268