Buying a Home at 25, Owning it at 40

Published by julia | Filed under Buyer / Seller Tips, Market Trends, Real Estate

Refinancing home loans is a huge topic of discussion right now. As the financial market just begins to crawl out of the recession, homeowners who managed to push their way through the tough times are now looking to refinance their loans to ease the financial pressure on the home. With stagnant credit scores and an interest rate that is not the lowest in history, how can the homeowner really profit from a refinance option? How about tightening the belt to save thousands of dollars?

Many original mortgages are entered into for a 30 year term. This means the homeowner will make the payments on the home for 30 years. This equals 360 payments. If the principle on the loan is $1,250 per month and the interest is $250, the homeowner will repay $540,000. Now, what happens when 15 years of interest is taken off the repayment of that loan?

At $1,250, the purchase price of the home was $450,000. The interest paid on the home was $90,000. If the loan term is reduced by 15 years to a 15 year mortgage, the homeowner will still repay the $450,000 but the interest repaid will lower to $45,000. That is a 50% reduction in interest.

The trouble with refinancing to a 15 year mortgage is the cost of the new loan payment. The $1,500 a month paid before will rise to $2,750 per month, but these payments will be made only for 180 payments versus the 360 payments on the previous loan.

These figures are rough, at best. In most cases, the interest on a home loan is far greater than $90,000 per $450,000. Many homeowners choose not to take the 15 year option due to the higher payments. No one wants to pay MORE for the same house, right? In the short term it does look like the home is costing the homeowner more money, but they are essentially paying more per month on the same balance.

When is the Right Time to Refinance to 15?

The perfect time for some households to refinance from a 30 year mortgage to a 15 year mortgage is after a big house bill is paid off. This bill could be a car payment or a credit card balance. This will often free up hundreds of dollars a month which could go straight toward owning the home outright. Once the homeowner collects the deed on the home, they will have buying power like never before and the ability to sell, remortgage or save as they see fit.