Home Refinance or Purchase - Look at the Amortization Schedule not just Monthly Payment

Last week the Federal Reserve Board announced at the FOMC meeting that the economy is in recovery mode but the pace should continue to be slow or moderate hence they decided to stand pat and not adjust a key interest rate. Does this mean the rate for a home loan will remain at historic lows? Well not necessarily but all the experts seem to agree it's a very likely scenario. Inflation is pretty much in check which means a more reasonable price to the tag regarding consumer goods however on the flip side the banks and savings & loans are not so generous when it comes to paying interest on your savings or CD account. I guess it all evens out when you think about it, a lower mortgage payment but also a lower return on traditional bank accounts and the reverse is usually true when we are in a more vibrant economy. Nevertheless right now I think most would agree while the economy is on the rebound it could be better especially on the job creation front.

So now let's take a look at the mortgage market, I'm certainly no expert in this area but I don't think expertise is a prerequisite in my scenario, as a matter of fact the existence of mortgage calculators relieves the average earthly human of manually performing the mind bending in depth mathematical equations necessary to create an amortization schedule. So if it's as easy as punching in a few numbers to get valuable info why not take a few extra minutes during your research phase to dig a little deeper and discover the pertinent differences in loan products?

Let's take a look at the difference between a 30 year fixed & 15 year fixed and the potential benefits of both. First of all the 30 year fixed is exactly that, a loan which consists of 360 equal monthly payments and takes thirty years to pay in full and then of course it's party time, you invite friends, family, and maybe even the local news media to document this " Burning of the Note Celebration ". Quick tip: Try not to use an excesive amount of lighter fluid or petroleum for this task, yes we all realize aside from your marriage this is probably one of the most joyous occations you will ever experience however your well deserved rational exuberance may lead to an excessive drenching of the mortgage note in the flamable fluid of choice leading to a potential unintended pyrotechnic spectacular. You certainly don't want all the money you will now be saving to go toward the hiring of a construction crew to rebuild the one asset it took 30 years to payoff do you? So please, have the celebration OUTDOORS and by all means PROCEED with CAUTION.

The following are some of the most important aspects to consider regarding the 30 year fixed loan:

• 30 Year payoff term
• Monthly payments
• All equal payments
• A significant portion of monthly payment goes toward INTEREST and not PRINCIPAL
  
• The portion of the monthly payment that goes toward principal rises minutely each month

The following are some of the most important aspects to consider regarding the 15 year fixed loan:

• 15 Year payoff term
• Monthly payments
• All equal payments
• A significant portion of monthly payment goes toward PRINCIPAL
• The portion of the monthly payment that goes toward principal rises minutely each month

After reading the above points I'm sure you can clearly see the main differences between the two. Obviously the 15 year fixed will contain higher monthly payments however significantly more of your payment is applied to the principal verses interest and it's the opposite regarding the 30 year fixed

The following is an example taken from an amortization schedule I just created:

30 Year Fixed

• Loan Amount - $200,000
• Interest Rate - 4.50%
• Total Monthly Payment - $1013.37
• Total Applied Toward PRINCIPAL ( 1st Months Payment ) - $263.37
• Total Applied Toward INTEREST ( 1st Months Payment ) - $750.00

* note - According to mortgage calculator I used, the amount applied toward the PRINCIPAL usually increases by approximately $1 or $2 every month.

15 Year Fixed

• Loan Amount - $200,000
• Interest Rate - 3.75%
• Total Monthly Payment - $1454.44
• Total Applied Toward PRINCIPAL - ( 1st Months Payment ) - $829.44
• Total Applied Toward INTEREST - ( 1st Months Payment ) - $625.00

* note - According to the mortgage calculator I used, the amount applied toward the PRINCIPAL usually increases by approximately $2 - $3 every month.

The above comparison is rather significant considering the same loan amount. Interest rate figures are approximate not exact depending on potential daily market fluctuations but I think the difference between the two loans is dramatic. The amount of monthly payment which is applied to the principal with a 15 yr fixed is more than 3 times that of the 30 yr fixed which means you build up equity that much faster in addition to paying off your mortgage in half the time. Loan calculators are a valuable tool when considering a new purchase or re-finance, just punch in the numbers and away you go. So I guess the bottom line is to figure out which loan term is best for your individual situation. If you qualify and can afford the higher monthly payment a 15 yr fixed might be the way to go especially now, or any time in the future, if interest rates flatline at historic lows.