When most people buy a home, they take out the standard 30-year mortgage to finance the purchase. A few ambitious souls opt for 15- or 20-year mortgages, so they can pay off their homes faster, save money, and retire early. When you start talking about 40- or 50-year mortgages, many homeowners simply cannot wrap their brains around the idea of paying on a house for over half their lives. But this can be a great foreclosure prevention strategy. I almost always advise homeowners to stretch out their mortgage for as long as possible. Here’s why:

• Keeping the monthly mortgage payment as low as possible protects homeowners in the event of future financial setbacks.

• You can make extra payments toward principal whenever you have surplus income, which will shorten the term.

Back in the 1980’s, many homeowners were refinancing into 15-year mortgages to reduce the term and pay significantly less over the life of the loan than a 30-year mortgage. In most cases, however, they could accomplish their goal without refinancing simply by making payments equivalent of what they would be paying on a 15-year mortgage. The only difference is that a 15-year mortgage typically comes with a slightly lower interest rate. To see how this works, google “mortgage calculator” and crunch the numbers for yourself. Here’s an example:

• With a 15-year $200,000 mortgage at 6% interest, the monthly payment is $1,687.71, and the homeowners pays $303,788 over the life of the loan.

• With a 30-year $200,000 mortgage at 6% interest, the monthly payment is $1,199.10 and the homeowner pays $431,676 over the life of the loan.

• By paying $488.61 extra toward the principal every month on a 30-year mortgage, payments are the same as those required by the 15-year mortgage, and the homeowner ends up paying off the loan in 15 years for a total of $303,788 over the life of the loan.

In other words, assuming the interest rate is the same and the 30-year mortgage has no early-payment penalty attached to it, you can pay off a 30-year mortgage in 15 years and reap all the benefits of having a 15-year mortgage. The only difference is that the 30-year mortgage provides the flexibility to make lower monthly payments if circumstances make it difficult or impossible to make the higher monthly payment. This flexibility can be key to helping homeowners survive temporary financial setbacks.

This term-extension strategy is similar to that of pay-option and flex-pay ARMs (adjustable-rate mortgages) but without the risks those products carry. They allowed borrowers to pay interest only, reduced principal and interest, or regular principal and interest. Problems arose because the only payment that proved to be affordable was the interest-only (negative amortization) payments, so borrowers were not paying down the principal. The term-extension strategy does not carry the same risks, because homeowners pay down principal and build equity with every payment. They can pay down principal and build equity faster by paying extra toward the principal when they have extra money, but they give themselves a fall-back position in case money gets tight for a time. Essentially, they create their own pay-option loan – one that works in their favor.

Of course, a 15-year mortgage usually comes with a slightly lower interest rate, which can save homeowners some money over the life of the loan. For instance, suppose the same 15-year $200,000 mortgage is at 5.5% instead of 6%. The monthly payment will be $1,634.17 (about $50 less than the same loan at 6%) and save the homeowner about $9,637 over the life of the loan. Personally, I think having the flexibility to make a lower monthly payment outweighs the potential savings of a .25 to .5 percent interest rate reduction.

Whether you are working with clients who are buying a home or existing homeowners who are negotiating a loan modification with their lenders, encourage them to at least consider a mortgage with a longer term to stretch the payments out for as long as possible. Encourage them to pay extra each month, if they can afford it, to pay down the principal earlier and build equity faster. When paying extra, remind them to clearly specify to their servicer that the extra amounts should be applied to principal, not to interest or escrow. Homeowners who pay extra should also double-check their monthly statements to make absolutely sure that the servicer is applying the surplus to principal.

The term-extension strategy can be a valuable tool in fighting foreclosure, preserving the American Dream of Homeownership, and stabilizing the housing market and neighborhoods in your area.

Published: May 4, 2009

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Ralph R. Roberts, CRS, GRI is an award-winning and internationally recognized real estate agent, author, coach, and speaker. Throughout his career, Ralph has proven his commitment to helping other real estate and sales professionals build upon their past and present success, grow and expand their businesses, and provide a rich and rewarding future for themselves, their customers, their employees, and their families. As president and CEO of Ralph Roberts Realty, Ralph has personally helped thousands of consumers realize their dream of homeownership. While selling over 10,000 homes (and buying and selling over 3,000 investment properties) throughout his 30-year career, Ralph has made the time to mentor and coach hundreds of professionals in real estate, sales, and a host of other fields. Ralph is a recognized authority on Real Estate and Mortgage Fraud; Residential Real Estate; Personal Salesmanship; Sales Force and Office Management, Motivation, Design, and Team Building; and Foreclosure Self-Defense and Loan Modification, fields in which he has demonstrated his commitment to preserving the American Dream of Homeownership. Ralph's numerous websites, blogs, seminars, and speaking engagements engage, entertain, and educate both consumers and professionals. Ralph is also an accomplished author with several successful titles to his credit, including: Power Teams: The Complete Guide to Building and Managing a Winning Real Estate Agent Team Financing Real Estate Investments For Dummies (John Wiley & Sons) Mortgage Myths: 77 Secrets That Will Save You Thousands on Home Financing (John Wiley & Sons) Foreclosure Self-Defense For Dummies (John Wiley & Sons) Protect Yourself from Real Estate and Mortgage Fraud: Preserving the American Dream of Homeownership (Kaplan) Foreclosure Investing For Dummies (John Wiley & Sons) Foreclosure Myths: 77 Secrets to Saving Thousands on Distressed Properties (John Wiley & Sons) Advanced Selling For Dummies (John Wiley & Sons) Flipping Houses For Dummies 52 Weeks of Sales Success (John Wiley & Sons) Walk Like a Giant, Sell Like a Madman (John Wiley & Sons) Cross-Cultural Selling For Dummies (John Wiley & Sons) To learn more about Ralph, visit AboutRalph.com, check out his daily insights on real estate and mortgage fraud prevention at FlippingFrenzy.com, or visit his latest blog dedicated to helping distressed homeowners fight foreclosure, KeepMyHouse.com. You can reach Ralph at or by calling (586) 751-0000.