Nov 14 2007
Pros and Cons of a 15 Year Mortgage
Among other things, a mortgage needs careful consideration when looking to purchase a new or used home. What things should you consider? The best loan rate, the lowest monthly payment, and the duration of the loan are a good place to start. Many of us base our opinions on the amount of the monthly payment, but before you jump on the mortgage with the lowest monthly payment, you may want to take a minute to look into a 15 year mortgage.
At first glance you may think that you can’t afford the payments on the 15 year mortgage, but notice how a 30 year loan does not cut the payment in half. This is an important point to take into consideration. Why isn’t the payment on a 30 year loan half of the payment on a 15 year loan? The answer: interest.
Interest
The interest you’d end up paying on a 30 year mortgage is more than double the interest you pay on a 15 year mortgage. We’ll assume a $250,000 price tag on the loan with a 6% interest rate (See table 1).
| Table1: 15/30 Mortgage Comparison | |||
| 30 Year | 15 year | Difference | |
| Monthly Payment | $1,498 | 2,109 | 611 |
| Total Payments | $539,595 | 379,753 | -159,842 |
| Interest Cost | $289,595 | 129,753 | -159,842 |
| * All monthly payments added together | |||
If you read the table right, that is over $150,000 extra you pay in interest on a 30 vs a 15 year loan!
Strapped for Cash
OK, so you see the benefits of getting the mortgage paid sooner, but where does the money come from? Here are some things to consider:
- your payment doesn’t go up (apart from taxes) inflation does
- Although you may not be able to afford your house immediately, by saving the extra pennies, or not going out to eat on a regular basis, you can afford the additional payment.
- Look at what you make now, vs. the cost of inflation. (wages tend to follow inflation.) you make more, but your payment never changes.
- Utilize your tax return properly. You can either use the return to pay your taxes, or eat the additional payment, this is, to say, assuming you have enough taken out in taxes.
In conclusion, if you can afford the extra money each month, you will cut 15 years off the life of your mortgage, and become debt free that much sooner. Just remember, there are always more than one option, if 15 years doesn’t work for you see what other year terms will fit your budget better. Any shorter term means more money in your pocket in the long run.