A Little Problem With 15 Year & 30 Year Mortgage Rates

If only the mainstream advocates that every home owner should learn how to use fast remortgages to turn their home equity into cash. And using that cash to build up their own personal cash thereafter. More people can enjoy the fruits of their hard work currently used to pay off a mortgage little by little.

Instead, what has been promoted in the mainstream is to take up 15-year or 30-year mortgages with fixed rates as the safest form of mortgage loan. The only safe thing here is that interest rates will remain the same. People have different risk profiles, and most people have a very low tolerant for risk.

For those who are risk adverse, you should really stick with 15-year or 30-year mortgages with fixed rates.

For those that can handle a little more risk, let me show you more of the options available to you.

The traditional fixed rate mortgage loan is probably the most well known mortgage loan around. In fact, most people only know a mortgage loan as a 15-year or 30-year mortgage. This is very popular because the interest rates and the monthly payments remain fixed throughout the tenure. So this provides a certain level of certainty for those that are risk adverse. From your initial application for the mortgage loan, you know exactly how much your mortgage payments will be for the entire repayment schedule of the proposed mortgage loan. You will know what you can look forward to with certainly.

But what borrowers often turn a blind eye to is that the longer a mortgage loan stretch out, the more interest they will pay in totality.

Let me give you a very simplified example.

If you borrow $200,000 at a flat rate of 4%, you will pay a total interest of $8,000 a year. In 10 years, you will be paying $80,000 of interest. In 30 years, you will have paid $240,000 of interest. That is even more than the mortgage loan you have borrowed from the mortgage lender! In total, you will have paid $200,000 + $240,000 = $440,000! More than twice the original loan amount.

Banks charges a higher rate of interest for fixed rate mortgage loans so as to offset the risk that interest rates will rise. In the event that interest rates rise, banks will lose out when they cannot raise your interest rates because you have signed on a fixed rates mortgage loan. So they lower their risk of losing out by charging you a higher interest rate from the start.

Forgive me if I’m wrong. But isn’t it a practice that you will reward your customers when they stick with you for a longer period? Just like cable television. If you signed on for 3 years instead of 2 years, you will get a good discount…

So if you see it this way, the only party that benefits from a mortgage deal with fixed 30 years interest rates is the mortgage lender.

You run into people who have got their feet stuck in these mortgages all the time. You meet that guy who owns a $2,000,000 house when his mortgage loan that he is still paying off was for $500,000 which he took up 16 years ago. But he is struggling financially because he has to pay off that mortgage for another 14 years. And because he has been late on payments because of his financial predicament, he cannot get a mortgage refinancing at the current valuation because of his defaults on the high monthly repayments. He may even be too old now to qualify for a good refinancing deal. This is a classic example of being house rich and cash poor.

When he was younger, he could have refinanced the mortgage loan at a much higher valuation while he also had a higher earning power. And put that cash he squeezed out from the mortgage refinance to harvest more returns on other cash instruments.

He didn’t. And he is stuck with a house that cannot pay him.

Real estate is now a popular vehicle for someone planning for retirement. They want to build up their very own little property empire and purchase as much real estate as possible. Bu  be careful of what you are doing with the mortgage loans. Because if you go about it wrongly without good advice, you are going to pay for it in the later years when you cannot keep up your personal earning power.