May 14, 2010, Newsletter Issue #218: Less Than 30-year Mortgage Options

Tip of the Week

Until about 20 years ago, you would request a mortgage term that matched your projected time period. Since the creation of the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), in the early 1970’s, most home mortgages are sold to FNMA, FHLMC or other major mortgage loan purchasers. These loans are put into “pools” and re-sold into the investment markets, primarily competing with bond offerings. Because of this, almost all first mortgage loans are written for either 15 or 30 years only, allowing potential buyers of mortgage securities to calculate their “yield” (projected earnings).

This doesn’t mean you cannot have a mortgage with a maturity shorter than the stated term. Here’s how it would work for you.

If you wanted to be mortgage-free in 22 years, you get a 30-year mortgage. Have your mortgage professional calculate what your payment would be IF it were a 22-year loan. Make that payment every month and your mortgage loan will pay off in 22 years! Why? Every dollar above the required payment for a 30-year loan is applied to your principal balance! You will get an additional benefit. Since your lender’s computer is only looking for the required 30-year mortgage payment, should you find yourself in a cash bind at any point, you can revert back to the scheduled payment, thereby saving you much needed money and keeping your credit rating perfect for your mortgage loan. A final – and most important benefit – if you follow your 22-year mortgage schedule, you will save thousands of dollars in interest, the amount of savings growing every month.

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