Are you a Mortgage Tortoise or Hare? How to Calibrate your Home Loan Radar

Moving Fast

Image by Mr.Thomas via Flickr

Why are you in such a hurry to pay off your mortgage?  We should take a lesson from the tale of the tortoise and the hare when it comes to home loans.  Slow and steady wins the financial race.

So let’s get back to our study of the truth about home mortgages after a brief detour to dissect Bret Arends’ Wall Street Journal pro home buying article.  Previously I explained Common Mortgage Belief #1: I’ll be more financially secure the sooner I pay off my mortgage.  Today we’ll look at a related misconception about mortgages.

Common Mortgage Belief #2:  I want the 15-year mortgage because my loan will get paid off earlier.

Uncommon sense:  A 30-year mortgage in most cases gives you the ability to prepay when you choose.  By making extra principal payments each month you can create a synthetic 15-year mortgage.  It is true that the interest rate on a 30-year mortgage is higher for two reasons.  You are paying a default risk premium to the bank for the extra 15 years of scheduled principal repayment.  The longer repayment period increases the odds that a life event will happen that makes you unable to repay the loan.  You can also look at part of the higher rate as an insurance premium in case your personal financial situation changes due to job loss or medical emergency for example.  If you suffer an adverse cash flow life event, you can return to the normal 30-year amortization schedule instead of the optional 15-year payment plan.  If you choose to make extra principal payments, you missed my earlier post that showed why prepaying your mortgage is not the best use of free cash.

Dictionary.com defines insurance as any means of guaranteeing against loss or harm.  A 30-year fixed rate mortgage has a guaranteed payment that will always be an option if you can no longer make extra principal payments.  You are insuring against the loss by foreclosure if you can no longer make the synthetic 15-year mortgage payment.

Slow and steady wins the mortgage race.  The 30-year fixed rate mortgage has several advantages over other forms of home loans including lower shelter consumption costs through lower monthly mortgage payments.  If shells were financeable dwellings, I’m sure the wise tortoise would have chosen a 30-year fixed rate mortgage.

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About Michael Shelton

Your Business Coach Facilitating Delegation and Work Group Engagement Michael Shelton has over twenty-five years of business and military accomplishments, including extensive experience with one of the largest, publicly traded real estate investment trusts (REIT). He is a qualified business coach with assignments in cross-functional work group management, strategic planning, unit leadership, joint venture acquisitions, executive education, mentoring, training and merger integration. Michael has accumulated best practices for building committed work groups from more than $4 billion of capital markets transactions and commercial property development. He served as a commissioned officer and helicopter pilot in the U.S. Army, and earned his MBA from The University of Arizona. Michael has served as a major conference panelist and is the author of Cash Flow Rich, Winning Ways to Evaluate and Finance Real Estate. Today, he helps business owners get more work group engagement as President and CEO of Shelton Business Services, LLC in Scottsdale, Arizona. Disclaimer: I don't offer investment, legal or tax advice. Talk to your broker, accountant or lawyer for investment, tax and legal help. I might own stock in the companies I mention on-line. My posts, tweets and other on-line activity are my personal thoughts and don't represent my employer or company.
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2 Responses to Are you a Mortgage Tortoise or Hare? How to Calibrate your Home Loan Radar

  1. Pingback: Seven Borrowing Resolutions for 2011: The Art of Won’t | Pro Borrower

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