Mortgage News: A Possible Affordable 15-Year Mortgage Solution

The cornerstone of the mortgage industry has been the 30-year mortgage, but a new 15-year mortgage solution was announced in September to make it possible to build home equity quickly to reduce risk to borrowers.

Since the founding of the Federal Housing Administration in 1934, the 30-year mortgage has been the bedrock of the path to home ownership for many Americans. The advantage of the 30-year mortgage is that the monthly payments for the loan are within reach of many homebuyers; however, with the changes in the economy and with underwriting standards during the past 80 years, this mortgage product has become riskier for some homebuyers. The reason is that for the first five to seven years of the loan, the payments go primarily to paying the loan interest, so only a small portion goes toward reducing the principle. This delay in building equity can put the borrower at risk if the individual experiences a job loss, medical issues, a divorce, or if there is a downturn in the economy.

A Strategy for Reducing Risk with a 15 Year Mortgage

According to a report by NPR, a mortgage expert from the American Enterprise Institute proposed a strategy for first time buyers and people with modest incomes to build equity in their homes more quickly. The strategy is to use the money set aside for a down payment to buy points, which effectively reduces the interest rate of the loan. Since you are paying less in interest charges, you build equity more quickly. This strategy does reduce the loan amount you are able to secure by about 10 percent and your monthly payment might be slightly higher. The advantage of this tactic is that you build up equity that provides a cushion in case of a financial emergency and you can own your home outright sooner than you would with a 30-year mortgage.

To find out of if a 15 -year mortgage is the right choice for you, contact a local mortgage broker today.