Quote:
Originally Posted by geotag277
What makes it poor advice? Mortgages should be managed as cash flow, and amortizing longer allows you to save/manage more of your money up front. You can always pay down the mortgage in lump sumps at the end of the interest term (typically 3 - 5 years), especially if the lower payment allows you to save more.
It's simply an option that should be considered by a borrower. If you are worried about rate hikes, it doesn't necessarily make your mortgage instantly unaffordable because you have the option to pay longer, and yes, pay the bank more interest.
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You are correct. There are situations in which that might be applicable however it my experience those are not the norm. I deal 99% with new buyers, people who are employees, not landlords or business owners who over the first 15 years of their mortgage will not be making substantial lump some payments and rely on the amoritzation to pay down their debt.
Take someone with a $350,000 mortgage, rate of 3.49%, amortization of 25 years. Let's say their stretched at $1,745 monthly payment but the bank says "don't worry, if rates go up will increase your amortization".
At maturity they'd owe approximately $302,000 If rates go up to 5.0% in 5 years, (which isn't even a lot), they'd need to bump their amortization back to 25 years and would owe $267,000 at the end of the term having paid $127,000 in interst over 10 years.
Consider if they didn't have to increase their amortization.
They'd owe $251,000 after year 10 (vs $267,000) and paid $125,000 in interest over the 10 years vs. 127,000.
You're basically paying $3,000 more in interest and $16,000 less in principle with an amortization extension (just over the first 5 years) and that's considering only using 5.0% as an interest rate. 6 years ago rates were 5.79%.
Now we're also talking about a $200 a month difference in monthly payment. So you're looking at $12,000. So your cost of extending your mortgage amortization is $7,000 for years 6-10 and it will keep increasing for ever additional year thereafter.
If in 5 years the average buyer can't handle a $200 increase in mortgage payments (but thinks wasting $7,000 in abitrary expense is ok) they should seriously consider a smaller mortgage.
If you're a landlord or business owner that values cash flow and assumes they'll be making lump some payments then you likely wouldn't need much of this explained to you.