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Creating Affordable Payments (Part I)
15 and 30 year fixed rate loans.
Creating affordable payments is one of today’s biggest challenges. Home prices have risen faster than incomes. We qualify more people today than ever, but payments are often still just too high. There are lots of ways to create affordable payments, but the sheer number of loan programs causes confusion and often leads to poor decisions.
When affordable payments are the issue, I like to start by giving clients a simple way to clarify the choices and understand the trade-offs. This is the first in a series of posts that follows that conversation.
First, imagine we draw a horizontal line on a piece of paper. We’re going to place conventional loans along this line from left to right starting with the highest payments. The 15 year loan would be first with the 30 year just to the right. Make sense? The shortest payback period creates the highest monthly payment. Now let’s use actual numbers to compare monthly payments.
15 year loan, $300,000, @ 5.75% = $2491
30 year loan, $300,000, @ 6.00% = $1798
The 30 year payment is about $700 less! You probably noticed that the rates are different. Lenders charge more to borrow the money for a longer term. We’ll see that again when we get to 40 and 50 year loans.
Now let’s compare total interest paid over the life of the loan. 
15 year loan = $148,421
30 year loan = $347,515
We notice right away that the 30 year loan costs $200,000 more! If you guessed that that all happens in the second half of its life, you’d be wrong. The 30 year actually costs over $88,000 more in interest during the first 15 years than does the regular 15 year loan. That’s what made the 15 year a popular traditional choice. When you’re buying your last house and can afford the payments, it’s a great way to save a pile of dough. But first time buyers can’t afford the higher payments. And we’re looking for ways to get you into the game now.
In Part II of Creating Affordable Payments you’ll learn the truth about 40 and 50 year loans. Got a question or need help with your loan. Email me. It’s what I do.
January 8th, 2007 at 11:22 pm
[...] In Part I we laid the foundation by briefly looking at 15 and 30 year loans. These traditional products offer safety, security, and in the case of the 15 year, save a pile of money. What they don’t do well is to create affordable payments. [...]
January 16th, 2007 at 12:15 am
[...] Okay, in our effort to create affordable payments, we laid a foundation with the 15 and 30 year fixed rate loans in Part I. We stretched the repayment term out to 40 and 50 year loans in Part II, and then looked at shorter term intermediate arms—the 3/1, 5/1 and 7/1–-in Part III. In Part IV, we looked at interest-only loans that eliminate the principal portion of payments entirely. [...]
January 16th, 2007 at 12:29 am
[...] Okay, in our effort to create affordable payments, we laid a foundation with the 15 and 30 year fixed rate loans in Part I. We stretched the repayment term out to 40 and 50 year loans in Part II, and then looked at shorter term intermediate armsâthe 3/1, 5/1 and 7/1â-in Part III. In Part IV, we looked at interest-only loans that eliminate the principal portion of payments entirely. [...]
April 18th, 2008 at 4:09 pm
[...] Okay, in our effort to create affordable payments, we laid a foundation with the 15 and 30 year fixed rate loans in Part I. We stretched the repayment term out to 40 and 50 year loans in Part II, and then looked at shorter term intermediate armsâthe 3/1, 5/1 and 7/1â-in Part III. In Part IV, we looked at interest-only loans that eliminate the principal portion of payments entirely. [...]