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15 Year Mortgage May Not Be A Good Idea

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.

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About National Realty Group

National Realty Group was founded in October 1991 by Jeff Maas. It started as a two man office but soon grew to a medium sized office. One of the original agents formed a new home development company soon after. Steven Walker Homes is now a large national home builder. Southfork Mortgage Company Corp. was founded in April 1990 by the owner of a large home builder. Jeff Maas stepped in as its Broker in September 1993. With the help of Jeff Evens, Jeff Maas was able to expand the company. In July 1994, the owner of Southfork retired and Jeff Maas and Jeff Evens purchased the company. They continued the growth and soon built it into a multi-million dollar corporation. National Realty Group remained separate until Jeff Maas sold it to Southfork Mortgage in 1996. This allowed the owners to expand National Realty Group while allowing its agents to provide mortgage services to their clients. In 1996, a branch office of Southfork and NRG was opened in San Bernardino. It was later moved to Redlands in the most well-known office in the city. In 1998, they opened an office in Temecula in the Temecula Valley Bank office. The offices were expanded and closed 45 million in real estate and loan transactions in 1998. In 1999, Jeff Maas purchased the company from Jeff Evens becoming sole owner and broker. Shortly after the name was changed to National One Mortgage Corp. The company outgrew its 3000 square foot office in Riversideand moved to a building of approximately 6000 square feet. The growth continued at a spectacular rate. The company grew to over 40 agents within one year. The expansion continued with the addition of 2800 square feet and later adding more space for a combined total of nearly 13,000 square feet. At our peak we had over 125 agents and 12 employees in the Riverside office alone. During the summer of 2003, we opened an office in Temecula at the corner of Rancho California and Margarita. This office was soon bursting at the seams with 42 agents and 3 full time employees. Due to the increased demand for our unique programs, by the public and real estate agents, offices were opened in Corona and Ontario in early 2005. The year saw more amazing growth with offices opening in Moreno Valley, Hemet, Las Vegas and Norco. Rancho Cucamonga and Phoenix opened the first part of 2006. A Murrieta office opened summer of 2007. The economy has not been kind to many real estate and mortgage companies. We have remained strong and successful. Our business model of a One-Stop Shop provides the exact service and convenience the Home-Buying public desires and needs.

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