Understanding the Impact of 30-Year Amortizations

The 30-Year Trap: Savior or shackle?

The 30-year amortization is back. Is it a gift for first-time buyers or a debt sentence? Let's run the math.

The Payment Illusion

Scenario: buying a $700,000 townhome (10% down). Mortgage: ~$650k.

• 25-Year Amortization: ~$3,600/mo
• 30-Year Amortization: ~$3,300/mo
  • Difference: $300/mo. That's groceries. It's the difference between "Approved" and "Rejected."

The Cost of "Breathing Room"

By extending the loan 5 years, you aren't just paying longer; you're compounding interest longer.

• The Cost: You pay an extra $115,000 in interest over the life of the loan.
• The Reality: You are buying a house + a luxury car for the Bank CEO.

It Fuels Price Growth

If buyers can afford a higher "monthly payment," sellers will just raise prices. The 30-year amort essentially increases the budget of every buyer, which pushes entry-level prices up.

Strategy: "Start 30, Pay 25"

If you take the 30-year option:

1. Use it to Qualify: Get the loan.
2. Automate Overpayment: Set your payments to match the 25-year schedule immediately.
3. The Benefit: You have the flexibility to drop payments if you lose your job, but you avoid the interest penalty if you stay employed.

Conclusion

It's a power tool. Used carelessly, it cuts off your leg. Used wisely, it builds a house.