How Does Financing Impact Cost of Ownership? We’ve found that three items have the largest impact on the cost of ownership due to financing.
The most talked about are the amount financed and the rate. For a moment, let’s talk about creating real equity while thinking like an investor. Payments are lower on 30 yr loans than 15 yr loans so most people choose the lowest payment.
What if you could afford the payment on a 15 year loan? Would it make much of a difference? If you look at the sample chart, a 30 year loan pays down about 25% of the original loan in 15 years compared to 100% on a 15 year loan.
How Does Financing Impact Cost of Ownership?
Let’s say you have a $250,000 loan at 4.125%. The P&I (principal & Interest) portion on a 30 yr loan is $1,211.62 That same loan on a 15 yr is $1,864.92. But wait, there’s more. 15 yr loans carry less interest rate. Currently 15 yr loans are at 3.5% which brings the payment down to $1,787,21 That’s a $575.59 difference per month but the law of compounding saves you much more than that.
Over 15 years you’ll pay $575.59 more per month which equals $103,606.20. However, Hawley Advisors noted that if you finance for 30 years you’ll still owe $162,423.19. That’s already a difference of $58,816.99. This assumes you have the money to payoff the mortgage in 15 years. If you don’t you’ll continue to finance it. If you do this for the full 30 years you will have paid back the $250,000 original loan plus an additional $186, 184.76 in interest for a grand total of $436,184.76
Had you financed this for 15 years you would have paid back the original $250,000 plus $71,697.14 for a grand total of $321,697.14 That’s a lot less than $436,184.76. In fact, it’s $114,487.62 less.
If you have the wherewithal to finance for less time you might wish to consider it. If you’re disciplined you might consider taking out 30 yr loan and paying like it’s a 15 yr loan. However, you will pay .625% more in the rate and it will require discipline.
The other two factors besides length of loan is the rate and the amount financed. A good agent can help you with both. Knowing which lender is best for you requires some knowledge. Each borrower has a unique set of circumstances. Some lenders offer better rates on FHA loans than others, while some lenders specialize in conventional loans.
We have lenders that offer bridge loans, construction loans, FHA, VA, USDA, bond programs, lot loans, portfolio loans, investor loans, and foreign national loans. If all this sounds confusing to you, you need to work with an agent that can point you in the right direction. Sometimes as agents we don’t know your full situation. This is why we work with lenders we can trust so we can point you to the right program for you.
Knowing the right people and who you can trust makes all the difference. An agent might negotiate a few thousand off the purchase price for you, but if you choose the wrong lender you can pay it all back and then some simply by choosing the wrong loan.
Most buyers focus on price of the home. We like to look at total cost of ownership. This includes price, rate, taxes, and other fees like HOA or condo fees, CDD’s, etc. This way you can make a fully informed decision and make that dream home become a reality. We hear stories where that dream home turned into a nightmare home because the buyer didn’t understand the full scope of the purchase. We want you fully informed.
You can search the MLS like a pro at www.LeeCountyOnline.com It’s the best property search website in SW Florida. However, please talk to an agent on the Ellis Team before you purchase. Not using us could cost you thousands. Our agents offer peace of mind. 239-489-4042.
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