A good friend of mine had just completed my system and was now debt free, with the exception of his house. He had purchased his house for $75,000 with a 5% rate at 30 years. He had listened to other friends tell him to make extra payments throughout the year in order to pay off the house in less than 30 years. My advice was this. Don’t make the extra payments. You see, since his initial mortgage loan, rates had dropped to around 4% for a 30 year loan. But looking at the 15 year loan, it had dropped to around 3%. Now that my friend was out of debt, previously paying off over $500 a month towards credit cards, he now had $500 to save. Looking at the numbers, a 30 year loan at 5% on $75,000 means that at the finish line (30 years from now) he would have paid with interest, $173,000. His monthly payments would be roughly $480. Now with his $500 free to work with every month, I recommended switching to a 15 year loan. 15 year rates dropped to 3%. Of course this would mean bigger payments every month. But with a smaller rate, his $480 would become $596 per month—only $116 more! This means paying off the house in half the time. And from that $500 after spending the extra $116, that still left him with $384 to put away.
The best part was that his total payment after paying off the house at the end
of 15 years would be $107,000. That’s $66,000 that he would save over a 30 year
mortgage. WOW!
Frugal Finance 