No, the 30-year mortgage is not a con – not exactly. But it sure is a good deal for the fat-wallet Wall Street banks. If I could get large groups of people to pay me interest for 30 years, it would make my day.
The large majority of borrowers have 30 year mortgages because that’s what everybody knows and talks about. When you get right down to it, there is no other reason. It’s simply the norm and everybody follows the crowd. Very few borrowers ever stop to give it a second thought. Requesting a 30-year payment will roll off a borrower’s lips faster than jello. Fact is, most borrowers could afford a 20 year mortgage loan. And many more could afford the 20 year payment by easily cutting back unnecessary consumption that we somehow find to be necessary.
America is built on debt. Our economy survives on debt being a good thing. In many other countries, the 30-year mortgage loan is non-existent. In Buenos Aires, mortgage loans are as common as 36 karat gold. Buyers show up at closing with a bag of cash – literally. In Argentina, until recently, mortgages were rare. Even now, mortgage loan terms in Argentina range from 5 to 20 years.
I agree debt is a necessary evil, however, with the ever increasing cost of homes/mortgages, far too many baby boomers will find themselves in an uncomfortable position at retirement if a huge mortgage still lingers. Our parents and grandparents never had such debt in retirement. Mortgage loans were reasonable and paid off when retirement arrived.
With the low mortgage rates available today, borrowers should pause to think about other options. The 20-year mortgage rate is extremey attractive and the payment is not much higher than the 30 year payment. Go even further by making one extra payment a year and you will find you can own your home in about 17 years.
So, you may ask why not just get a 30-year payment and pay extra so you can keep some flexibility with the mortgage payment. You may have heard this theory before. The answer is simple. Because it has been proven that most people will NOT stick to an optional form of investment or early prepay. When given the option to pay more or invest more, etc., on a month-by-month basis, most people fail to follow through. But when it is set up, structured and required, amazingly, people make it work.
Take a look at the mortgage snapshots below. Compare:
- A $250,000 loan for 30 years at 5.00%
- A $250,000 loan for 20 years at 4.25%
- A $250,000 loan for 20 years at 4.25% (make one extra payment per year)
Mortgage at $250,000 for 30 years at 5.00%
Mortgage at $250,000 at 4.25% for 20 years.
Mortgage at $250,000 for 20 years at 4.25%
(Paid bi-weekly OR making one extra payment per year)
At the top center of each analysis, you can easily see the estimated loan balance at the end of 10- years.
After just 10 years, the loan at 5.00% for 30 years would have a $71,717.21 higher balance than the 20-year bi-weekly loan at 4.25%.
At the very bottom, you can compare total interest and total payments at the end of each loan.
Want a personal analysis for your loan? Just yell.
Til my next post . . . .
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{ 1 comment… read it below or add one }
It might not be a con, but it’s a ripoff ( joke) . Banks love the idiots who love a 30 year loan. I know people with tiny little loans who don’t even need the lower payment, but still have a 30 year loan. It might sound like a good option to get the 30 year & pay more each month, but most people will not stick to the plan.