The Magical 15-Year Wealth Building Home Loan

By Ryan Dosen

 

The traditional fixed-rate 30-year mortgage is what most people first think of when they consider how they are going to finance the purchase of their home. It’s the most common form of financing, probably because it often makes your guaranteed payment the lowest. Adjustable rate mortgages can currently give you a less costly upfront payment, but those payments can jump significantly a few years down the road when the rates are recalculated.

With today’s historically low rates, many have understandably been chomping at the bit to lock in their 30-year rates at the lowest possible level so that they can enjoy the ride once the Fed allows rates to climb higher.

But is the lowest possible payment your best option? It may be your best option if your sole goal is to get yourself into the most expensive and nicest home possible. However, what if you could take a little less house now in exchange for owning your home in half the time? Or, what if paying a little more each month meant being able to apply the majority of your monthly payments to principal right from the start?

Maybe it’s time to reevaluate our home ownership priorities.

 

The Wealth Building Home Loan

For the first half of a 30-year mortgage, the lion’s share of your mortgage payment is paying interest. It’s not really until you hit the second half of this traditional loan that you’re really doing significant damage to the principal. The problem with this model is that you are really building very little equity or wealth with your first 15 years of mortgage payments. This does little for your retirement and leaves you with little room for dealing with life’s little hiccups.

To help address this issue, Edward Pinto, a conservative resident fellow at the American Enterprise Institute, and Bruce Marks, the liberal leader of the Neighborhood Assistance Corp. of America, teamed up to create an exciting new mortgage product called the Wealth Building Home Loan.

The Wealth Building Home Loan is a 15-year fixed rate mortgage that requires little-to-no down payment and no additional fees. Having a shorter term (and benefiting from today’s low rates), the rate on this loan is less than that of its 30-year sibling. Additionally, rather than having borrowers pay large down payments, Pinto and Marks’ product allows a home buyer to “pay points” (a “point” is 1 percent of the loan value) and buy down their interest rate even further. Specifically, Marks worked with Bank of America and Citibank to offer an especially good interest rate reduction for paying points. Paying a point on a Wealth Building Home Loan can reduce your interest rate by half a point.

Pay enough points up front and you can reduce your rate to almost zero. A woman named Kimberly Wright of Memphis, Tennessee recently closed on the purchase of an $82,000 home using a Wealth Building Home Loan. She paid approximately $5000 up front to buy points and now has a near-zero interest rate. Nearly all of her $650 monthly mortgage payment goes directly to her principal, quickly building equity in her home. As Pinto says, “the money is going literally directly from your left pocket to your right because you’re in effect writing a check to yourself.”

 

Alternatives to the 15-year Home Loan

Local mortgage expert Karen Jackson of Waterstone Mortgage in West Chester says that an alternative to the 15-year mortgage is “to build equity by pre-paying on a 30-year fixed-rate mortgage. One extra payment per year will reduce your total term by 7 to 8 years if you start doing that early…. By pre-paying, you are essentially skipping over high interest payments at the beginning of the loan and advancing down your amortization schedule to payments that are more principal and less interest.” Jackson says that prepaying can be made possible by using a bi-weekly payment schedule (instead of a monthly schedule). “You end up making 26 half-payments or 13 full payments over the course of a year (in lieu of the standard 12 payments)”.

 

Practicality Pays

15-year mortgages, especially these Wealth Building Home Loans, can help you quickly build equity and achieve the American dream of owning your home. Of course, even with near-zero interest rates, your monthly payments may be higher than they would be with the 30-year variety (read: you’re going to have to “settle” for a little less house). However, you are paying your loan off in half the time. You are also keeping much more of the money you are paying for yourself in the equity you are building in your home. You are, as indicated by the name of the loan, building wealth, and doing so at a rapid clip.

Don’t go into debt. Be responsible. Build wealth.

 

— Ryan Dosen manages The Wayne Megill Real Estate Team of Keller Williams Brandywine Valley in West Chester. Contact Ryan Dosen for buyer or seller representation or for more perspective on the local and national real estate market by emailing rdosen@megillhomes.com or calling 610-399-0338. Please also visit The Wayne Megill Team blog at www.PAHomesAndRealEstate.com.

 

This article was published by 21st Century Media and the Daily Local News (West Chester, PA). To read this article on the the newspaper’s site, please visit the Daily Local News.

 

 

To view all of Ryan Dosen’s 21st Century Media real estate columns, visit http://www.dailylocal.com/search?text=dosen.