Could You Tell Me the Advantages and Disadvantages of Choosing a Short-Term Loan (Seven, 10 or 15 Years) vs. a Longer-Term Loan of 30 or 40 Years?
Each week, Second Opinion asks two real-estate professionals one of your questions. Read what they have to say, right here.
LONG TERM LOAN GIVES FLEXIBILITY
NAME: Eric Weinstein
TITLE: President, Carteret Mortgage Corp.
With any type of loan, your payments go first toward paying off the accumulated interest on the loan for that month, with the remainder going toward the principal to pay down the loan. The only difference in a shorter amortization (say a 10- or 15-year) vs. a 30- or 40-year loan is that more money goes toward the principal each month with the shorter loan, paying down the loan faster.
The question is really, where is your excess money better served?
If you have a 7 percent loan, basically you are paying that amount down, which might work out to 5 percent after taxes, when you might be getting a larger return on your money in the stock market.
Theoretically, you could always get a 30-year loan, invest the difference (between the higher-payment 15-year amortization and a lower-payment 30-year amortization) and at the end of the year, take your winnings and pay down your loan.
There is no right or wrong answer. The matter is one of personal preference, of where you want to invest your excess money. We get high-net-worth individuals (who could pay off the entire balance tomorrow) who opt for our interest-only loan or negative amortization mortgages (in which you do not even pay enough to pay interest for the month, and the balance is added to the loan).
They feel they can get a better return on their money elsewhere. We also get people whose goal is to pay off their loans before they retire and opt for shorter-term ones.
LONG-TERM-LOAN DISADVANTAGES: The loan is paid off slowly, costing more interest over the life of the loan. Typically, such loans have a slightly higher interest rate than do short-term loans. They are bad for people without the financial discipline to make extra payments voluntarily.
LONG-TERM-LOAN ADVANTAGES: Excess money might be better invested elsewhere. The loan has lower monthly payments, with the option of paying down the loan voluntarily.
My suggestion is to get a 30-year mortgage and voluntarily pay more each month. …