Posted by Mike Smith :: June 5, 2008 @ 6:48 amI previously covered the importance of total cost versus monthly payments as it relates to buying a car. It seems that the practice of selling the monthly cost is prevalent in other industries as well, including home mortgages.
I am currently a few years into a 15-year mortgage and well on my way towards paying it off early. By choosing a home that I could afford, I am easily able to make my monthly payments. Paying extra each month is allowing me to reduce the total cost of my loan even more. Yet I recently received a letter from a mortgage lender urging me to refinance into a 40-year mortgage.
As homes have become more expensive and other non-traditional loans have been making negative headlines, the 40-year loan has been gaining in popularity. It makes monthly payments more affordable, but obviously makes the cost of borrowing money even more expensive. While there isn’t anything inherently wrong with using a 40-year mortgage to keep payments down, if you can only afford a home by using such terms, you are probably looking at homes somewhat beyond your means. It’s true that 30-year mortgages are arbitrarily used as a “standard” mortgage, but as a result a lot of home affordability calculators and rules of thumb are based on the 30-year standard.
The real problem I have with the 40-year mortgage is the way it was marketed in the mailing I received. It highlighted that 40-year mortgages offer “one of the lowest monthly payments available” and allow you to ”get the extra cash you need to do the things you want.” This is the same old sales pitch we heard from the car salesman. It basically tells you to forget about the total cost of the loan and only focus on what it will cost you each month. To me, this is exactly the type of deceptive marketing that has gotten a lot of mortgage lenders into trouble lately. The fact that they are now touting 40-year mortgages instead of interest-only loans or adjustable rate mortgages is a step in the right direction, but they are still pushing people to buy more than they can really afford.
The total cost of a mortgage, like any other financing, is really the important point. While we may want to trade current benefits for a future cost by extending the term of our mortgage, in the end doing so will cost us more. Waiting until you can afford a home with a more traditional mortgage may not be the most popular course of action, but will certainly serve your finances well.
2 Comments
renegotiation is a good option
Yikes!!! Hold on for a second. Advertising a 40 year mortgage as a way to save money for things you like is not necessarily deceptive marketing. I agree with you entirely that we should get the house we can afford and to pay it off as soon as possible to keep the total cost down, but you have to remember that 30 year mortgage came about early last century so the "average" man could get into and eventually payoff what would be considered a descent size home. With home prices rising to new heights so fast over a short time, the advent of a means to make more affordable payments on a home that a family can fit into may be justified. I've seen 50 year mortgages advertised, so times are a definitely changing. Look, let me just say again that I agree with paying off a mortgage, or any loan, as quickly as possible. I myself will be paying off my 15 year mortgage in under 13 years. BUT, home buyers have to educate themselves about mortgages and how they work. I became so interested in mortgages that I got my mortgage broker license last year (no, I'm not going to try and advertise my service) and realized that with enough shopping, the borrower can structure a deal in many different ways that suits his or her needs. Adjustable Rate Mortgages are not the evil entities they are made out to be in the media and not all mortgage brokers and bankers are slick double talking salesmen. Borrowers have to be held responsible for the decisions they make when it comes to something this important. The best advice I can offer is to shop, shop, shop around. Do some research, decide on the terms you want and then get on the phone going from one broker or bank to another. You'll be surprised that it is you that holds all the cards in this game.
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