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Monday, May 20, 2019

As a mortgage professional, I task myself with the responsibility helping my clients get the fastest, most economical, and utmost hassle-free mortgage. I also, however, work with my clients to help them address all of their short-term and long-term financial objectives - minimizing their financial and mortgage burden well beyond the close of the loan. This week I thought I would share an exchange between myself and a client about a common mortgage topic.

Shmuel,

Thanks for all of your assistance with our home buying adventures thus far. We’ve come a long way, please continue to be patient with us. Your handholding and advice are more valuable than you can imagine. I do have a question that my husband and I were contemplating regarding our mortgage.

My husband is very averse to debt and would want nothing more than to pay off this pending mortgage sooner than later. He suggested that we get a 15-year mortgage instead of the traditional 30-year mortgage. What are your thoughts on that, and would it make sense in a situation like ours? You obviously have all our information and know more about the finances than our accountant, so I do value your opinion and guidance on this. What are your thoughts?

Yours Truly,

Un-interest-ed in New Jersey

Dear Uninterested,

Thank you for your kind words. It has truly been a pleasure to work with you both, and to help along this journey. Your question is quite common, and I am sure you won’t be surprised to learn that most people don’t want to pay more interest and carry a loan longer than necessary. While I cannot offer personal financial advice, and I recommend speaking to a personal financial advisor who is very comfortable and familiar with your situation, I can certainly give you some of the factors of consideration to help you make a better and more informed decision.

The way I see it, your particular situation has a few variables that are perhaps unique to you and might be of significance as you contemplate this decision. The first factor of consideration is affordability. While you are more than qualified for the mortgage, I certainly do not have all the information I would need to determine if you can comfortably afford the extra $932 that the 15-year mortgage would entail. Granted, your interest would be more than double with a 30-year loan, but that is mostly a component of the “term” and not the rate. Rates are typically 0.375 to 0.625 less for a 15 year, which is not mathematically and psychologically as consequential as people think.

Additionally, in your situation, you have told me that you are either doing work or selling the house in 4-6 years. If you do choose to do work, will you later regret forcing yourself to contribute the additional +/- $55,000 in principal which would now be tied up in “equity” in the house? I can’t tell you how many times people push themselves into a mortgage situation that seems feasible initially, but then they regret it later on. For example, sometimes people choose to put down a more substantial down payment to get a smaller loan (and monthly payment) only to scramble for the extra cash needed later on.

Furthermore, notwithstanding the interest rate reduction of getting a 15 versus 30 year, a person can accomplish almost the same thing on their own if they are fiscally disciplined. For some of my clients, I have suggested opening a separate “household” savings account where you automatically transfer the extra monthly “principal prepayment” (in your case, $932).  At the end of a year, you will have accumulated over $11,000, and $55K in year five. At any point in time, you can choose to use that money towards paying down principal whether that be at the time of a refinance, sale or otherwise.

As you can see, the decision to “avoid” paying interest is quite extensive. The best solution is to work with someone who is highly experienced and considers your best interest beyond just “closing your loan.”

Shout out and Happy Birthday to Tsippi Cantor, Efrayim Clair, Jonathan Kaplan, Josh Shor, and Eileen Silvestri.

By Shmuel Shayowitz


Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Approved Funding is a mortgage company offering competitive interest rates as well as specialty niche programs on all types of Residential and Commercial properties. Shmuel has over 23 years of industry experience including licenses and certifications as certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. He can be reached via email at [email protected]