There are loan programs available that the banks/lenders don’t want you to know about. They have shorter terms (length of time to repay) than the traditional 30-year mortgages. Loan programs exist today with terms of 10, 15, and 20 years. However, you rarely (if ever) hear about these. There are also loan programs today that carry a long term such as 40 or 50 years. I bet you have heard of these. There is a very good reason that you probably haven’t heard of a 10-year mortgage; the banks don’t want you to know about them.
Interest rate is probably the most over-focused-upon aspect of a mortgage today. People will haggle with their lender/broker over one eighth of a point (0.125%) while not giving any consideration to other parts of their loan. While it is true that the interest rate will play a role in determining the monthly payment, it is not as important as people believe. A lower interest rate can save you a few hundred dollars. A lower term can save you tens of thousands, if not hundreds of thousands of dollars.
Let’s look at an example:
Loan amount = $500,000
Interest rate = 5.00%
Term = 30 years (360 payments)
Total interest paid = $466,280
Loan amount = $500,000
Interest rate = 7.00%
Term = 20 years (240 payments)
Total interest paid = $430,360
Loan amount = $500,000
Interest rate = 7.00%
Term = 15 years (180 payments)
Total interest paid = $308,950
Loan amount = $500,000
Interest rate = 7.00%
Term = 10 years (120 payments)
Total interest paid = $196,650
As you can see in the above example, the term is what you need to focus on. You should notice that an interest rate that is 2% higher and a term that is 10, 15 or 20 years shorter would cause you to pay far less interest.
In the above example, your payment after you cut your 5% 30-year loan to a 7% 10-year loan is just barely over twice the amount. I know many people will read this and say to themselves, “I can’t afford a payment that is twice what I am paying!” I would encourage them to consider a free consultation by an honest, experienced mortgage professional. Such a professional should be able to structure your loan so your monthly outgo can remain the same or lower and with a shorter term. Additionally, the interest rates in the above example are merely that – an example. In reality, a 10-year mortgage will typically carry a lower interest rate than its 30-year counterpart. The single best piece of advice you can take (when it comes to paying the least amount of interest on your loan) is to get a loan with the absolute shortest term that you can afford.