This question has been very popular among the people looking to refinance, since the mortgage rates continue to be at historic lows.  (I heard that someone locked in at 4.5% the other day…)

In all reality, there are two main things to consider when deciding on a 30 year mortgage versus a 15 year mortgage.

1.  The difference in monthly payment.

Consider the fact that the minimum payment on a 15 year mortgage will be higher than the 30 year mortgage.  If you are financially in a position to comfortably make the minimum payment on the 15 year, then we highly recommend the doing the 15 year mortgage.  Now, keep in mind the 30 year mortgage has a lower minimum payment.  If you are doing a standard conventional mortgage, it will not have a prepayment penalty for paying down or paying off the mortgage early.  So, it might be a good idea to go ahead with the 30 year and make larger payments when you can afford them, since there is no penalty for those extra payments or early payoff.

2.  The amount of interest you save over the life of the mortgage.

We are going to use this example to show some numbers: 
$200,000 mortgage at a 5.0% interest rate for both the 30 year and 15 year.

The total amount of interest you will pay over the life of a 30 year mortgage is $186,513.24
The total amount of interest you will pay over the life of a 15 year mortgage is $84,685.48

That’s a whopping $101,827.76 difference in interest you will pay!!

Ok, ok, I know what you are thinking and that’s “I probably won’t stay in this house for 30 or even 15 years”.  That’s ok, we’ve given an example of more real numbers.

The total amount of interest you will pay in the first 5 years of a 30 year mortgage is $48,076.13
The total amount of interest you will pay in the first 5 years of a 15 year mortgage is $44,009.37

That difference is $4,066.76.  Yes, just in the first five years of your mortgage you will save $4066.76, when you choose the 15 year mortgage versus the 30 year mortgage.  Again, if you can afford the 15 year mortgage payment, we highly recommend paying less interest over the life of the mortgage loan.

Here is something else to think about when deciding.  This is an example of how much more you will pay down your mortgage balance when deciding on the 3o year mortgage versus the 15 year mortgage.

Example:
You have a $150,000 loan amount and the interest rate is 5.0% on a 30 year mortgage. 

The principal and interest payment is $805.23.  Of that $805.23 payment, only $180.23 goes toward the principal balance of your mortgage loan.

Now, compare the same loan amount and interest rate on a 15 year mortgage.  The principal and interest payment is $1186.19.  Of that $1186.19 payment, $561.19 goes towards the principal balance of your mortgage loan.

In a full amortization schedule, the amount of your payment that goes towards principal increases each month.  For the sake of simple numbers, let’s assume the same amount of principal goes towards your balance each and every month.  Using the example of $150,000, the difference in the principal is $380.96.  ($561.19 – $180.23 = $380.96)  If you took $380.96 over the next year, that would equal $4571.52.  Over 5 years, that would be a whopping $22,857.60!!  Yes, that is how much you would reduce your mortgage balance over the next 5 years, using the example above.

We always recommend a 15 year mortgage, for another reason that you will pay down your mortgage balance faster.  Also, you usually get a lower interest rate on the 15 year mortgage versus the 30 year mortgage, so you will be paying less interest over the life of the mortgage as well.

We will continue to write more about mortgages in the coming weeks, since mortgage refinances and first time home buyers are where most of our recent questions have come from. Since mortgages rates continue to be at historic lows and first time home buyers that purchase a home by November 30th will receive a $8000 tax credit, these two things alone have stirred the mortgage craze lately.

When you are buying a home, regardless if it’s your first home or your 8th home, you are allowed to have the seller pay for your closing costs.  As a buyer in this type of market, you have a better chance of the seller paying for some, if not all, your closing costs.  All you need to do is  include the total amount of your closings costs into your offer to purchase contract.  If you are not entirely sure how to do this, then let your real estate agent know you are thinking about doing this.

Now, if the seller says they do not want to pay for your closing costs, then all you have to do is show the seller he or she will not loose any of their bottom line if you increase the purchase price enough to cover all of the closing costs.

Example:

Let’s say the you are offering $200,000 for the purchase of this home you want to buy.  Your total closing costs for the mortgage is $1900.  Offer the seller  a purchase price of $201,900.  The seller will than gladly pay for your closing costs, because his bottom line does not change.

Yes, essentially you are paying for the closing costs over the life of the mortgage loan, but the point here is that less money has to come out of your pocket at closing.  Can you think of a few good things to buy for your new home with $1900?

Keep in mind that the lender allows up to 3% of the purchase price for the closing cost credits.  In some cases, the cap is 6%, but it’s normally 3%.

Example:

On a $200,000 purchase price, the maximum closing cost credits would be $6000.  ($200,000 x 0.06 = $6000) 

A way to use these closing cost credits to the fullest extent is to use the extra money to buy down the interest rate.  Depending on home much it costs to buy down the interest rate, you could save $50-$100 more on your mortgage payment!  Not to forget about the amount of interest you will save over the life of the loan when the interst rate is lower.

This kind of thing has been around for awhile, but since we are see more and more people starting to buy homes again, we thought a little refresher would help.

There is still one mortgage program that allows you to refinance without having to verify your credit scores. 

 Yes, you can have a credit score in the 500’s, or even lower, and still get approved for a mortgage refinance.

The only program that allows this approval is called a FHA Streamline Refinance.

What is a FHA streamline refinance?

It’s similar to a regular mortgage refinance, but your current mortgage loan that is being paid off has to a FHA loan as well.  So, you are basically going from an existing FHA mortgage loan to a new FHA mortgage loan.

Now, a streamline does not allow you to take any additional cashout.  The purpose of the streamline refinance is to lower your existing interest rate, if available at that time.

What are the benefits of doing an FHA stramline refinance?

The most popular reasons why someone would qualify for a streamline versus any other mortgage loan are the following:

• No credit score verification is necessary.
• No income verification is necessary.
• No asset verification is necessary.
• No home appraisal is necessary.

This program has become extremely popular for these types of people:

• If your homes value has depreciated to the point where you owe more on your mortgage than the home is worth.
• Self employed person.  It’s always difficult to verify income for these people.
• People with low credit scores.  As long as you are current on your mortgage.

The FHA streamline refinance will continue to be one of the most popular mortgage refinance programs on the market.  The mortgage rates continue to be at historic lows,  so anyone currently in a FHA mortgage loan will benefit from refinancing into these lower interest rates.

If you would like a second, or even a third, opinion on the refinance you are looking to do, please don’t hesitate to contact me.  On the top of this site, you can check out the list of states I’m able to help someone with financing.