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 5.5%, you could expect to pay a total of $208,808 in interest over the life of the loan. On the same $200,000 with a 15-year loan at 4.8%, you would pay only $80,950 over the life of the loan. That is a huge savings! And ultimately, it only costs a few hundred more per month.
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 toward 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.
A 15-year mortgage isn't for everyone, but it's certainly worth considering given today's interest rates. You could also make headway on your 30-year mortgage by making extra payments, but a 15-year can also help you lock in a lower rate. Compare the benefits of a 15 or 30-year mortgage to see what might be best for you.