A 30 Year Fixed Rate Mortgage is Too Expensive?

It is simple mathematics: Most homeowners are only comfortable with a 30 year fixed rate mortgage. Most homeowners do not have their mortgage for longer than 5 years. Therefore, most homeowners are paying thousands of dollars in additional interest just because they don’t know all of the options available to them.

For example, today’s 30 year fixed rate mortgage through company A is 5.75%. That same company will provide a fixed rate of 5.5% on a Hybrid fixed rate program that is fixed for 7 years and will then adjust annually thereafter. For a $300,000 mortgage, the 30 year fixed rate mortgage would cost $5,230 in additional interest in the first seven years and the remaining principal balance after seven years would be $1,250 higher. That’s a total of $6,480 of additional cost in seven years. Not to mention the mortgage payment would be $48 higher every single month.

This translates into much more than just a higher monthly payment or thousands more paid in interest for the same money. The $48 per month could have allowed the borrower to afford $10,000 of more buying power today. With just 5% appreciation, that $10,000 would grow to $14,000 in value. That additional equity translates into $40,000 additional buying power for the next purchase assuming 10% down. Or, the $48 could go into a company matching 401K program providing over $6,000 in retirement savings (not including any gain on the account) over the seven year period.

Knowing the different mortgage programs that are available is essential to making the right decision. For some, a 30 year fixed rate mortgage may be the most cost effective option should they keep the same loan until it is paid off. Many homeowners may plan to live in a home ‘forever,’ but seldom does that mean they won’t refinance or take cash out to improve the home. Then, when interest rates drop, they refinance the total debt to save money. Having a financial plan and being realistic about where you want to be in 5 or 10 years will help you choose the right mortgage.

Washington mortgage broker and Spokane Real Estate Agent, Michael Sanborn, tells his clients that there are over a hundred mortgage programs to choose from. “Homeowners should research the various mortgage programs available online,” says Sanborn. “There are many resources, including the Upfront Mortgage Brokers Association or the Mortgage Professor, that allow folks to see what is available before they caught up in the emotional phase of buying a home. They need to separate the financial aspect of financing a property from the emotional aspect of owning a home.”