Personal finance planner Dave Ramsey is known for his nonsense advice and insistence on avoiding debt.
Millionaire consultant started his financial journey at the bottom. He filed for bankruptcy at the age of only 28, and since then he has built an empire that advises everyday Americans on how they deprive their debts and make one million.
Recently, his efforts toward 30-year mortgages have been lowered, and he has learned that longer mortgage terms are more interest than you choose to pay for a 20-year or 15-year term. He strongly warns readers of his blog not to reduce monthly payments with just a longer mortgage.
In his words: "Of course, the 30-year plan gives you smaller monthly payments. But, for longer, the repatriation plan will have more funds for interest each month - which also lowers the main balance much slower."
A mortgage is an amortized loan, or a loan that you make a scheduled payment (usually monthly), and this payment applies it to both the principal and interest paid on the loan. Payment is first used for interest, and everything else is used for the principal. This may mean that smaller monthly payments will make you pay primarily interest rather than repaying the principal.
To demonstrate the difference between a 15-year mortgage and a 30-year mortgage, let's take this example as an example.
Assuming your home has a $1,000,000 mortgage, you'll have a 20% mortgage or $200,000. At a 7% mortgage rate, if you choose a 15-year term, you pay $8,932.49 per month and your interest payment for the life of the loan will be $329,653.94.
By comparison, on a 30-year mortgage, your monthly payment will be $6,586.03 and you will pay $580,894.27 in interest. In other words, the extra 15 years will cost you another quarter of a million dollars - $251,240.33 to be exact. This is a quarter of the value of your home, and it is also a lot of cash for your retirement savings, your child’s schooling or improving your home.
Ramsey advises his readers to develop their own amortization schedule to make sure they have a clear understanding of how long-term mortgages think of them throwing money.
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Of course, affordability is the first problem for Americans, and 30-year mortgages are hard to find additional funds because it is difficult to pay for large mortgages every month.
In addition to recommending shorter loan terms, Ramsey offers some tips for getting the best mortgage for you. Here are his advice words - and some of our own suggestions.
By comparing several different lenders to complete the assignment, you can get a better mortgage rate or amortization schedule for your loan. Don't feel like you have to go with your existing or recommended bank. If you have time to explore your choices, do as much as you can.
If you are buying a new home, pre-approval of your mortgage can help you move faster when you close your home. This process can also be long. Due to federal regulations in the industry, it usually takes 45 to 60 days to get a mortgage.
Your lender will review your credit history, income and current debts during the process of evaluating your mortgage. You may also expect you to file a bill for assessments, property inspections, investigation fees, ownership searches and lender reviews.
Do research ahead of time to understand the needs, expenses and schedules of each step of the process. This can help you manage stress while shopping for your new home.
If you have an existing mortgage or have to sign a 30-year term, try your best to budget for additional loan payments. If you can pay extra monthly payments, these payments are usually used for your loan principal, not interest. Even thousands here and there can help you eliminate at the price of your balance and pay off your mortgage faster.
Finally, Ramsey suggests that existing mortgage holders may consider refinancing the loan to reduce maturity.
"This will change your interest rate, monthly payment amount and amortization period," he wrote.
Again, this is a place to stroll around and spend some time. Look for lower interest rates and shorter amortization periods while keeping monthly payments realistic. If you manage to raise your wages or reduce your debt or expenses since your first loan agreement, refinancing is a smart move that can bring you closer to your debt freedom.
This article provides information only and should not be construed as advice. It is without any warranty of any kind.