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Best Financial Moves - 15-Year Mortgages


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Pay Yourself Instead of the Bank

Would you like to own your home free and clear before your kids start college? Before you retire? Or would you simply like to save a significant chunk of change over the life of your mortgage, perhaps as much as $100,000? Consider the 15-year mortgage instead of the more common 30-year mortgage.

If you think you can't afford to pay off your mortgage in half the time (15 years versus 30 years), you may be wrong. While the monthly payments are somewhat higher on a 15-year mortgage, the interest rate is typically a bit lower, which offsets part of the increase in the monthly payment. See the illustration at the bottom of this page.

Most importantly, you end up paying less than half the interest over the life of the loan. When you consider that if you borrow $100,000 for 30 years at 8% you will end up paying the lender over $264,000 ($100,000 principal loan amount and $164,000 in interest), it's worth the higher monthly mortgage payment if you can afford it. For most people, this is the greatest opportunity they will ever have to save a very large sum of money.

You may wonder if you could achieve the same thing by putting the difference in the monthly payment into a savings account and letting it earn interest. If you saved $193 every month without fail over a 15-year period and put it in a money market account or other account earning 4% interest, your money would grow to $47,495. Not bad, but it's less than half what you'd save by having a 15-year mortgage.

In reality, this is not as simple as it sounds. There are complexities we haven't considered, such as the fact that by paying less interest you'll also get less of a tax deduction. However, tax deductions for mortgages are over-rated. Sure, if you're in the 28% tax bracket you save 28 cents for every dollar you pay in interest, but you're still paying 72 cents in interest to a lender. What sounds better to you: save 28 cents or save 72 cents?

The real issue is that most people will NOT exercise the discipline necessary to consistently and without fail save the difference (in this example, $193) every month and never touch it for 15 years so that it will grow to the same amount they would have saved with a 15-year mortgage.

In summary, with a 15-year mortgage versus a 30-year mortgage:

  • You build equity much more quickly
  • You own your own home in half the time
  • You save more than half the amount of interest
  • The rate is typically lower than the rates on 30-year mortgages and stays the same throughout the life of the mortgage

The 15-year mortgage may or may not be right for you, but it's worth considering. Use the Internet to educate yourself and run some numbers with a few of the excellent online mortgage calculators (see Elsewhere on the Net in the box in the upper right of this page) before speaking to your lender.

Note: The higher the interest rates, the more dramatic the savings in a 15-year mortgage versus a 30-year mortgage. As of this writing, mortgage rates are fairly reasonable. However, let's say that rates were to go back to the 9.5% level. Under that scenario, the payment for a $100,000 mortgage would be $840 per month and the total interest paid over a 30-year loan would be $202,707. The same amount of money borrowed over 15 years at 1/2% lower rate (remember, 15-year rates are usually 1/2 to 1% lower than 30-year rates) would result in a monthly payment of $1,014 and total interest paid of $82,567, a savings of $120,140! What are the chances you will save this amount yourself in 15 years, given the myriad of demands on your finances?

15- vs 30-year Mortgage Illustration

30-yr @ 8% 15-yr @ 7.5%
Loan Amount $100,000 $100,000
Monthly Payment $734 $927
Total Interest $164,165 $66,862
Savings $97,293

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