Homeowners Straying From 30 Year Mortgages

Real Estate
on December 6, 2012

In the past, the 30 year mortgage has been a fairly standard contract for people who are entering into housing agreements. The general idea is that people buy a house to last a lifetime, and by the time retirement draws near, the house should be paid off. Meanwhile, the monthly payments are small enough that individuals are able to handle them. However, this line of thinking has been changing recently.

With a 30 year mortgage, homeowners are paying a huge amount of interest in exchange for those low monthly payments. The difference may be somewhat minimal from month to month, but it adds up to a great deal over the course of 30 years. Thus, many people who are entering into contracts nowadays are opting instead for 15 year contracts. With these agreements, they are responsible for paying twice as much per month, but ultimately, they will be paying considerably less.

Another problem with 30 year mortgages is that they tend to give the buyer a false sense of affordability. They don’t have anywhere near enough money to pay for the house, but they figure if they stretch the payments out for three long decades, they will manage.

But what if there is a change in their circumstances? What if they lose the job that enables them to pay on that mortgage every month? The longer they are stuck in that agreement, the more things can change. Ideally, a homeowner should be able to pay at least 10 percent of the cost of the home up front as a down payment, and the payment each month should be about a quarter of one’s monthly income.

Additionally, paying for an excessively expensive house over the course of 30 years robs homeowners of the chance to invest more money in savings. The money that can be saved through not having to pay all that extra interest can be invested in various ways and yield thousands or even millions of dollars over the course of a lifetime, depending on how expensive the house is in the first place. Having too much money tied up in a house prevents such fruitful savings.

Those who are thinking about buying a house should consult with a financial planner or a real estate expert. These people can be of great assistance in helping create a feasible financial model for those who want to own a home while also remaining fiscally solvent.

Found in: Real Estate
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