Question: For some time I have been wondering if I should consider getting a fifteen (15) year mortgage, as I do not want to be burdened with a mortgage in addition to condominium fees. Assessing how and when to consider such a change is confusing to me, and I would appreciate your advice on the advantages and disadvantages of the fifteen (15) year versus the thirty (30) year mortgage.
Answer: I must state at the outset that I am biased against the fifteen (15) year loan. While there have been many commentators who have praised what they perceived to be the benefits of a fifteen (15) year mortgage, in my opinion, such a mortgage rarely makes sense for the average homeowner.
Let’s look at some examples. You want to compare a $300,000.00 loan to be amortized on a thirty (30) year basis as compared to a fifteen (15) year basis. Lenders typically will provide a lower interest rate if you take a fifteen (15) year loan rather than the thirty (30) years. So for comparison purposes, let us assume that a 30 year loan is 4 percent and a 15 year loan is 3.5 percent.
To amortize the loan over fifteen (15) years, your monthly payment of principal and interest (P&I) is $2,144..65. On a thirty (30) year basis, the P&I is $1,432.25. As you can see, this is a $712.40 cash savings per month on a thirty (30) year loan. On a yearly basis, this is a savings to you of $8,548.80. That’s a lot of money.
Keep in mind that the interest deductions for tax purposes will, by and large, be the same for the first few years, but as your principal balance goes down faster with the fifteen (15) year amortization, accordingly your interest payments will also be smaller.
Thus, the major benefit of the fifteen (15) year loan is that you will save a lot of interest over the life of your mortgage. You are also putting up, in our example, over $8,500 a year toward principal, thereby reducing your mortgage balance and building up your equity.
Equity is the difference between the market value of your house and the mortgage or mortgages which you owe. In good real estate market conditions, property values increase on a yearly basis as much as ten to fifteen percent. Even in bad times, we all hope that property values will at least keep up with inflation, although obviously there will be dips and decreases in market values on a periodic basis. Many homes impacted by the “mortgage crisis” several years have now rebounded.
And assuming that we anticipate growth over the next decade, the equity in your house will grow regardless of the amount of your mortgage. This equity is “dead equity” and in my opinion, you might as well be taking that extra $8,548.80 and burying it in your back yard. In effect, that is my analogy for the fifteen (15) year mortgage.
I would rather take the extra $8,500.00 a year and invest it somewhere. I could put it in a pension plan, I could invest it in the stock market, I could give it to my children, or I could spend it on a vacation with my family.
After all, what will you do with your house fifteen (15) years from now when your mortgage is paid in full? I know of too many people who are currently house rich and cash poor. When you are in retirement, you may not keep that house, or if you do, you want to make sure that you also have some sort of nest egg to be able to enjoy your retirement years. If you have put all of your money into your house, and then you retire, you may not be in the financial position to tap into that equity at that later date.
The Department of Housing and Urban Development (HUD) has just tightened up the loan requirements for a Reverse Mortgage, so you may not be able to count on that down the road.
Accordingly, in my opinion, take the extra $8,500.00 a year and invest it in a conservative, long-term investment for the next fifteen (15) years. Even without any computation for interest, this will grow in the next fifteen (15) years. That will be the start of this important nest egg for the rainy day.
However, the advice I give is obviously general. You are advised to discuss your specific needs, plans and tax considerations with your own advisors.
As homeowner associations age, both structures and landscape wear out. And just like those groovy harvest golds and avocado greens of the 70s, landscape tastes have changed. Fortunately, the varieties of plants available have made the options wonderful and numerous. The best news of all is that creative use of these options coupled with the latest irrigation technology can significantly reduce both maintenance and utility costs. That is landscape news every HOA can use: more is less. Here are few pointers to get the landscape renovation process moving:
1. Develop a Landscape Plan. Rather than cruising Walmart looking for plant bargains, hire a landscape architect who will integrate site, irrigation, curb appeal and maintenance needs in a comprehensive plan. This plan will include specific plant selections that are placed appropriately for best impact. The plan can then be bid by a variety of installation contractors so the HOA can get the best value.
2. Convert Turf to Planting Beds. Reduce maintenance and water costs. Bushes have deeper roots than turf and require less water.
3. Tree Thinning and Replacement. Developers are notoriously bad about planting too many trees, the wrong kind or letting the low bid dictate the number or mix. Generally, since new trees come in small calipers, it takes more of them to make the desired marketing impact. What did the job 20 to 30 years ago has now produced an over dense mix of trees that are too close to buildings, roads and walkways. An arborist can evaluate the mix and make removal and replacement recommendations to suit a mature landscape.
4. Modernize the Irrigation System. Recent improvements to irrigation technology now deliver water where and when it’s needed. With more zone control, turf and planting beds receive differing water amounts. Rain override sensors eliminate cycles as needed. Drip irrigation provides steady yet low water flows to planting beds. Buried drip systems apply water directly to the roots, and reduce water loss through evaporation and runoff. Drip systems are coupled with traditional sprinkler systems to deliver water efficiently.
For any homeowner association over 20 years old, the time has come, the walrus said, to talk of many things. But few things are more compelling than landscape renovation. Cut costs, lower maintenance, improve curb appeal and up market values…a true plantasy.