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We have all heard about the PITI formula: principal, interest, taxes and insurance. These four items make up the monthly payment that homeowners send in to their servicer each month. The first piece, principal repayment is the gradual reduction in the loan balance over the term of the loan. And interest can be thought of as the rent you pay for borrowing the money you used to buy your house. And because home loans are calculated with a simple interest calculation, the amount of interest charged declines each month as the principal balance of the loan is paid down. Taxes are paid to the county or municipality collecting them and lenders require that we maintain insurance coverage on the house to protect them (and us) against loss due to fire or other casualty.

Of these four elements, the interest we spend over the life of the loan is typically the greatest expenditure, so when a borrower has an opportunity to significantly reduce that expense, it's worth considering. Given current market conditions, that opportunity may be at hand.

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For the first time in a long time, the differential between 30 and 15 yr mortgage terms has become quite significant, rewarding the shorter term borrower with a rate in the mid to high 4% range (with points). In contrast, the typical borrower who chooses a similar loan with a 30 yr term will pay a rate in the low to mid 5% range with similar points.

True, both these rates are excellent when compared with predominant rates over the past 30 some years. But any time you have the opportunity to lock down a home loan rate of 15 years at any rate under 5.50 percent; it's a true bargain, particularly in a culture that has moved from spender based, to saver/wealth generation based. As an example, on a $275,000, 15 year mortgage at 4.75%, the average monthly P&I is $2,139.04. On a like 30 year mortgage at 5.5% (approx .75% higher in rate), the P&I is $1,561.42, $577.62 lower a month. HOWEVER, if you can swing the extra $577 in this example, the upside is you pay off your mortgage 15 years earlier, AND your total life of loan interest is $110K vs. $287K on a 30 year, over $177K saved in interest payments.

Does this equation work for you? Does $177K in saved interest sound appealing, whether you are purchasing or refinancing?

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Posted in Health and Medical Post Date 02/25/2016






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