There has never been a better time than now, for new buyers and existing homeowners to take a reduced term mortgage that will set them up to be mortgage free for an earlier retirement. Because of plummeting mortgage rates the 20 year fixed loan is now at 4.375% and the 15 year fixed is available around 3.99%. Today’s record low interest rate environment is presenting just that opportunity.
Look at options to a 30 year loan
I would say because of the really low rates recently, almost 40% of my clients have been taking reduced term mortgages in the past couple of months. The 20 fixed loan has been the loan of choice, as it has an affordable payment payment for a lot more clients with rates being so low. The 15 year fixed payment is usually just a little too high for all first time buyers. The idea of being mortgage free in 20 years and saving more than a $100k in mortgage payments and interest compared to a 30 year loan, is now becoming very appealing to a lot of buyers, as it opens up a whole new door of opportunities for retiring earlier.
Educating homeowners with more options
I believe that now more than ever, we must be ready to take the time to truly teach people what is happening in the market and why it is happening. Then, and only then, can they truly make the right decisions for themselves and their families. Its important to show buyers and homeowners why record low rates are presenting the opportunity of a lifetime to get a shorter term loan that will enable them to save more money and help them achieve their retirement goals a lot earlier.
Compare the Savings on a 20 Year Loan vs a 30 Year Loan!
Here is a great example that compares the total savings on a 20 year fixed loan versus a 30 year fixed loan. For this particular example, let’s take a $400k 30 year fixed loan at 4.875% and a 20 year fixed loan at 4.375%. The difference in payment is only $387 a month more for the 20 year fixed loan. I know this will be too much for some people, but it will also be affordable to a lot of people too.
Now lets compare the total mortgage savings on the 20 year fixed versus the 30 year fixed loan, as you can see below the 20 year loan will save $161,175 in mortgage payments and interest over the 30 year loan. (See Net Savings)
Now lets see what the balance of each loan will be after 10 and 20 years. As you can see after 10 years, the 20 year fixed loan has already paid down an extra $81,147 in principle. Now let’s look at the balances after 20 years…on the 20 year fixed the balance is $0, whereas the loan balance after 20 years on the 30 year fixed is still $200,732.
So the two huge benefits here are #1 the borrower will payoff his home 10 years early and get to retire earlier, #2 the borrower will save over $161k in mortgage payments and interest.
Chat to family and friends about a 20 year loan?
A recent Wall St Journal article noted that 50% of US households have an interest rate over 5.75% on a 30 year fixed loan. Have a chat with your friends and family and ask them if they have a rate this high, or if they would be interested in looking at a reduced term 20 year fixed loan and becoming mortgage free for an earlier retirement?
You can let them know that if they qualify, they would be able to refinance into a 20 year fixed loan at 4.375% or a 15 year fixed as low as 3.99%. I would be happy to help out any friends or family you have and present the figures to them as shown above, so they can make an informed decision about their future goals. As these record low rates really present an opportunity of a lifetime for many homeowners and buyers who can now look to achieve retirement goals a lot earlier.
An update on mortgage rates
Mortgage rates are still edging downwards as investor cash continues to pour into the US bond market from around the world. Mortgage bonds actually had their new “price record” (highest yields on record) on Monday the 7th of June when the Fannie Mae 4.5% coupon priced out at 103.00 (see trading chart below). What does this mean to consumers? It means that if these yields stay around this high 103.00 range for the next few weeks or so, and this becomes a solid new trading range, lenders might be offering 4.5% 30 year fixed rates across the board very soon. What a fantastic opportunity this would be for new buyers and current homeowners who can refinance.
BUT also do not discount rates spiking up either as we are in a very volatile market right now. It is the Euro crisis that is driving everything lower including the US stock markets..Remember when stocks go down, this causes bonds to up and mortgage rates rates in turn go down. But if the Euro crisis starts to dissipate fast and the “flight to safety” of investor money to the US markets alleviates, then we will see rates rise fast.
Personally I don’t see rates moving too much higher than they currently are for a few months or maybe even longer, as the member countries in the Euro zone are only starting to acknowledge and realize that severe austerity measures need to be initiated immediately in most countries. This will be a long drawn out and painful process for many countries, as evidenced by the recent riots in Greece and current union strikes in Spain. So in summary, while the Euro zone continues to have problems, this will keep money flowing to the US bond and treasury markets, thus keeping US mortgage rates low and the US stock markets lower too. But when you hear that the Euro zone is starting to get its house in order, watch this as a key factor for rates to rise and US stocks to improve again.
If you have any questions about any of the information above, please do not hesitate to contact me directly at 858-200-9602. I look forward to chatting soon.
