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Different Amortization Periods

Just because the lender doesn't advertise a 20-year loan doesn't mean it doesn't offer one. The same goes for 25-year and 40- year loans. But you have to ask your loan officer. Why ask? Because you can in fact get closer to your goal of paying as little interest as possible while making sure the monthly payment feels comfortable to you and you can qualify. Let's examine the interest paid over the life of the loan with a few different amortization periods.

15 year

Payment

$2,143

Taxes

$ 200

HOA

$ 200

Total

$2,543

Term

Rate

Payment

Lifetime Interest

40 year

6.75%

$1,508

$473,840

30 year

6.50%

$1,580

$318,000

25 year

6.50%

$1,688

$256,400

20 year

6.25%

$1,827

$188,480

15 year

6.25%

$2,143

$135,740

10 year

6.25%

$2,807

$ 86,840

Changing amortization periods will have a dramatic effect on your payments and your interest paid. Clients who select a 15-year loan are often shocked at how high the payment would be. I always suggest looking at 20-year and 25-year loans along with a 30-year fixed loan. There are just a handful of lenders that offer even longer periods, but I would not recommend a 50-year loan. It's simply too much in interest. But even with a longer amortization period, you can also save on interest by prepaying the note. Prepaying the note means paying down the principal balance ahead of time.

Prepayments

You can prepay a loan down any time you wish. Some loans carry a prepayment penalty should you pay down the mortgage ahead of time. But typically those penalties are charged on loans for people with damaged credit.

One of the loan documents you will sign when applying for a mortgage is the Truth in Lending Form, or TIL. This form has lots of numbers and boxes on it, but one of the boxes toward the end of the form states: This loan does/does not have a prepayment penalty.

If there is a prepayment penalty it can be assessed in two ways: hard or soft. A hard penalty means you can't, under any circumstances, pay any part of the note ahead of time without paying the penalty. A typical penalty is six months worth of interest. Hard penalties used to be more common than they are today. In fact, they're becoming extremely rare. A soft penalty is a loan that doesn't charge you a prepayment penalty if you:

• Sell the home

• Pay no more than 20 percent of the balance during any 12-month period

• Keep the loan more than three years

This means that although there are a few prepayment penalty-type loans out there, they are not nearly as common as they were just a few years ago. In most cases, you can pay ahead any time.

This is a good option for those who really want to reduce the interest paid over the life of the loan but can't afford the 15- year payment. For those, a good strategy is to take the pay down of a 30-year amortization period as though it were a 15-year loan.

In this example, you'd pay the $563 difference each month on top of your regular 30-year fixed-rate payment. Most lenders have a line or a box on the mortgage statement where you enter in the amount extra you're paying.

Some months when unexpected expenses arise and you don't want to make the extra payment, you have the luxury of making the standard payment.

When you pay down a fixed-rate mortgage, your monthly payment amount won't ever go down. Remember, it's fixed for the life of the loan. You're reducing the loan term. If you make the extra $563 payment each month, you'll find that your loan is paid off in 15 years, not 30.

There is another method of prepayment to reduce the term of the loan: biweekly. A biweekly program is a method where monthly payments toward the principal balance are paid every other week instead of once per month.

If you desire to reduce your mortgage with this method, I suggest taking one payment amount, dividing it by 12 and then making that payment each month. At the end of the year, you'll have made one extra mortgage payment. This can shorten the term by five or six years.

Biweekly programs are often marketed to homeowners by firms that charge a set-up fee. But it's actually something you can do yourself without paying the fee.

 
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