By Moshe Wilshinsky
One concept I find borrowers in Israel have an issue with more often than borrowers in the US (even with American clients in Israel) is the length of time (i.e. numbers of years) to take the loan for. This is referred to as the “term” of the mortgage. The focus in Israel seems to be how long that commitment is and by keeping the money out over that period of time the amount of cumulative interest paid to the bank.
Perhaps because of the elaborate “Truth In Lending” regulation in the US which requires very detailed disclosure of all the interest and others cost paid over the life of the loan etc. which in term help educate borrowers. In most years in the US market the 30 year amortization is the most commonly used length of time. The exception is in low interest rate markets like these with a strong borrower who can afford a higher monthly payment and want to pay off the loan quicker they opt for 15 years.
The two key issues here are the higher monthly payment and the borrower’s ability to afford that as a long term commitment. Let me give you an analogy I often give to our clients to illustrate the point the point.
If I told you I can save you 50% on your rent, you would be very interested, but if I told you that in order to save that money you would need to move out after six months you would say that is ridiculous and its missing the whole point you need to pay for housing over that period of time.
Ahh, time is not a secondary issue here, it is in fact one of the key issues. In the apartment analogy it is clear the renter needs to live someplace so they pay rent based on the time they are using the apartment, for as long as they need the apartment. So with a mortgage you have purchased the property but “renting the money”. With most people the number of years you need to rent the money has to do first and foremost with how much they can afford to commit long term to pay per month.
There are those people who before they buy a home they budget, taking in to account their available down payment and how much they will need to pay per month over the amount of years (10, 15 20 etc.) they want to have the mortgage paid off in. That gives them a price range they can afford, and they then look for an area that matches that price range. However in practice as sensible as the above seems, these are the minority. Most people start with a desire (or perceived need) to live in a particular area and the value range of that area and their down payment determines the amount of the mortgage they need. Now the primary issue that will contribute to how much their monthly payment is the term of the loan. Simply put, the mortgage payment for a 15 year loan will have a payment that is significantly higher (50% +) at today’s interest rates.
So lets do away with some misconceptions- in most cases when you take a 30 year mortgage you will not be keeping that mortgage for 30 years and you are not obligated to either. You can still pay off the loan in full or part whenever you want. The issue to consider is the prepayment penalty which I have discussed before in this publication before. The key issue here though is that the monthly payment you are committing to should be an amount that fits into your budget. By using a longer term you are lowering that monthly amount and with today’s interest rate market the difference, if any, is not that significant (yes the interest rate on a 15 year will have a significantly lower interest rate than 30 year term).
So the bottom line is you are no more a “frier” for taking a 30 year loan if that’s what you can afford as you are paying rent to your landlord for as long as you need the apartment.
Moshe Wilshinsky is the CEO of Moville Mortgage & Finance Ltd. Contact information: In Israel, dial: 073-796-2226 and then press the special 711 Bizness Magazine extension. In the U.S., dial: 201-377-3418; in the U.K., dial 208-596-4501. Website is at: www.movillefinance.com.