Shelf Life of a 30 Year Loan
Over the years, in my mortgage business where I usually the standard 30-year loan for most of my clients, I have noticed one thing.
My clients have been losing an average of $140 per month for about 5 to 7 years at a time. That’s an average of $8,400 to $11,760 which they could have in their savings, rather than paying it to the bank for what most would say is “peace of mind”.
Yet, if you ask me, having that money in my bank account would be even more peaceful. 😊
Most banks put a shelf life of 5 to 7 years on the 30-year loan. Why?
Because, everyone’s life changes quite a bit within that time.
Think about it: What was your life like 7 years ago? And seven years before that? What about 7 years from now?
Because of this, my clients and most people in the country, refinance about every 4 to 7 years.
Within this time so many things can happen:
o People get married
o People get divorced
o Have a child
o Lose a job
o Change jobs
o Have a parent move in
o Children getting married
o Children going to college
o Rates drop
o Sell to upgrade or downgrade the home
Because of these life changes, people usually need to change their mortgage to assist them with what they are needing in their life.
There are some other loans that will work great for these people. Yet, most everyone wants the “security” of the 30-year fixed, so they usually opt for this loan and commit to a higher rate and payment for the next 5 to 7 years.
These other loans are known as ARM’s: adjustable rate mortgages that are 30 year loans and they are only fixed for: 3, 5, 7 and 10 years. They all offer a lower rate and shorter fixed period that will provide higher savings over that time, compared to the 30-year loan.
So let’s say a client has this 400K loan:
- 30 year fixed is 4.875% = $2,116.33 / mo.
- 10/1 arm is 4.5% = $2,026.74. $89.59 savings ($1,075.08 / year) over 5 years $5,375.40
- 7/1 arm is 4.25% = $1,967.76. $148.57 ($1,782.84 / year) over 5 years $8,914.20
The hardest part about getting these savings is getting over the “fear” of the adjustable rate loan.
I’ve even had clients want to buy down the rate to the 10/1 arm so they pay 1.5 points. A point is a % of the loan.
So paying 1.5 point is paying 1.5% of the loan amount: on a 400K loan that’s 6K.
Again the idea is: "This is the last loan I’m gong to get", and I want the payments low and after a 5 years I’ll be paying less.
Yes, that is true. IF, and it’s a big IF, you keep that loan for 30 years or even just 10.
Yet inevitably 4 to 7 years later, I end up getting the call. Hey Cezar, how are things? My daughter is going to college this year and we need about 40K to pay for tuition and to fix up the house a bit. What are the rates today? And guess what, they are asking about the rate for another 30-year fixed loan.
That’s it, their mortgage payment was not only higher every month for 5 years, but the balance is higher too because they rolled those points into the loan last time.
It’s hard to get past this fear of the Adjustable… rates could go higher by then. My response to that is yes, they may be higher. Yet, most likely they will be needing to refinance at that time anyway.
What I have also noticed is how hard we work and bust our butts to make sure we pay everyone else, yet when it comes to ourselves, we just slack off.
So the next time you sit down to think about your mortgage and the largest payment you have, think about how your life is going to change and if you can be comfortable with the ARM product. Heck, at least look at the numbers. The savings could be huge over 10 years and that extra money in the bank will offer much more peace of mind while you’re refinancing for the 3rd time in 15 years.
If you find this information interesting, or helpful and want to hear more on this topic, please let me know, and feel free to reach out and setup a meeting to review your situation.