With tighter lending standards, and a soft real estate market, more people are flocking back to fixed interest mortgages. The standard has been, and is still largely the 30-year fixed mortgage, but the 15-year is still an attractive option. The biggest reason people overlook the 15-year mortgage is the perceived higher monthly payments. Obviously, when borrowing the same amount of money, the shorter the term, usually the higher the monthly payment. But what many people fail to realize is just how small the monthly payment difference might be, and the substantial amount of money that can be saved over the term of the loan.
Some Major Benefits
The greatest benefit of a shorter term mortgage is the savings on interest. First, most 15-year mortgages have a lower interest rate compared to a 30-year. But even more important is the fact that you only have 15 years worth of interest to pay instead of 30. Take a $200,000 mortgage as an example. On a 30-year loan with an interest rate of 6.3%, you could expect to pay a total of $245,660 in interest over the life of the loan. On the same $200,000 with a 15-year loan at 5.9%, you would pay only $101,847 over the life of the loan. That is a huge savings!
The other major benefit is the ability to build equity fast. With a 30-year mortgage, it takes many years before your monthly mortgage payment begins to go substantially go towards the principal. With a 15-year mortgage, you begin building equity much faster. This is especially important in cases where many people only live in their home for 7-10 years as it is. Having a 15-year mortgage will allow you to sell after a shorter period of time with more equity, which can help significantly in a real estate market like we have today.
Learn more about the advantages of a 15-year mortgage and see how spending a couple hundred dollars more a month on your mortgage payment can yield substantial savings and help you reach your financial goals even faster.
I’m always fascinated at how folks like to debate the pros and cons of a 30 year vs. a 15 year mortgage. Its like debating the pros and cons of apples vs. oranges. They are both popular fruit, but it is strictly one’s opiinion as to which is better. It simply depends on your own personal tastes, requirements, and desires. With mortgages it depends on your circumstances and oppertunities. If you have a wonderful oppertunity to invest the dollar difference in monthly payment between a 30 and 15 year mortgage, than you should consider the 30 year at say 6.5% if you can invest the difference at a rate higher than that. By choosing the 15 year at say 6% you are effectively investing the dollar difference at 6%. Of course during this economic climate that sounds pretty good, but the crux of the issue when comparing the 2 alternatives is “what is your oppertunity cost”. IE, what are my options when it comes to the increased funds I would be allocating to my mortgage. Of course there are other factors, but this is one that is so important, yet often not mentioned.