Payoff Home Loan Early!

Nef Cortez

By Nef Cortez

You can save tens of thousands of dollars, possibly even hundreds of thousands, in the repayment of your home loan by using a very simple money management trick.  The typical home loan that is taken out in the purchase of a home is written or amortized over a 30 years period.  The most common reason for this is that is the way to maximize the ability to qualify for more of a home. With prices of homes so high here in Diamond Bar, and throughout Southern California, some homebuyers even opt to get a 40 year amortized loan.

A home purchased with a down payment sufficient to finance a loan of $500,000 amortized over 30 years will have a monthly mortgage payment of $2,387.08 (using a 4 % rate and excluding taxes and insurance). The same home with the $500,000 loan amortized over a 15 year period will have payments of $3,574.41. Even with a ½% lower interest rate for the shorter term, the monthly payment is $1,187.33 more than the 30 year mortgage.  Using the qualifying “Rule of Thumb” of 3 times the mortgage to determine the monthly income necessary to qualify, the Homebuyer would need an additional $3,561.99 monthly income to qualify for the home loan.

The homebuyer, instead of needing to have a total monthly income of $7,160, or $85,932 annual income, would have to have a monthly income of $10,721, or $128,652 annual income. This substantial difference in income required to qualify is the main factor why homebuyers choose the 30 year mortgage over the 15 year mortgage.

The decision to purchase the home with the lower monthly payment over a 30 year mortgage will cost the homebuyer a total of $859,320 over the fully amortized period. If the homebuyer was able to qualify for, and support the higher initial monthly payment of the 15 year mortgage, the total cost over the fully amortized period would be $643,393.8.

The simple disciplined payment of an additional $100.00 to the 30 year amortized loan will result in the loan paying off in approximately 24.5 years, saving approximately $78,000 in interest payments. This is the effect of a disciplined, consistent, managed plan that, although small in scope, has great benefits in the long term.

This article was written by Nef Cortez, a licensed Real Estate Broker, Cal BRE # 00560181 since 1976. He can be reached via e-mail at nefcortez@gmail.com. Please feel free to email any questions regarding real estate.