Sometimes it can be difficult to know whether to go with a 15 or 30-year mortgage. Of course, circumstances such as income, expenses, or other financial obligations can often dictate which mortgage is best.
In our last home purchase, we decided to go with a 15-year mortgage over a 30-year loan. And there was one major reason why - the huge savings this type of loan could provide over time.
Lower interest rate
At the time we were obtaining our mortgage, the difference between a 30-year and a 15-year term was about 1 percent. A 30-year rate was at around 6.5 percent and a 15-year was at about 5.5 percent. Today's rate differential is about the same even though rates are significantly lower, with 30-year rates currently right around 4.3 percent and 15-year rates closer to 3.3 percent.
This reduction of rate might not seem like a big deal at first, but it can add up significantly over time.
Less interest over time
Our loan was for $165,000. This amount at a 6.5 percent rate over a 30-year term would have amounted to about $210,500 in interest added to the balance of the loan over time for a total payment of about $375,500 (not including costs to obtain/payoff the mortgage).
A 15-year term at 5.5 percent amounted to only about $77,600 in interest over the course of the loan though, and a total of around $242,600 for the total loan cost (again negating other fees). This equates to a difference of almost $133,000 over the course of the payment periods between the two types of loans.
Even though the shorter-term mortgage meant that our monthly payments would be higher, it was worth it to us to pay more in the short term to save more over the long term.
It's not hard to run the numbers
Even if you don't know much about interest rates, mortgages and amortizations, this doesn't mean it's difficult to see what the difference in loan terms can make. There is a litany of mortgage calculators available online these days to help make the process simple. Just plugging in the interest rate, length of loan, and loan amount into a mortgage calculator can provide not only monthly payment information, but how the loan will be amortized over time and how much total interest will be paid on the loan.
Taking a minute or two to conduct such calculations before you decide upon a mortgage term could end up saving you thousands of dollars or more over time as it did for us.
More From This Contributor:
The author is not a licensed financial, real estate or mortgage professional. This article is for informational purposes only and does not constitute advice of any kind. Calculations have not been verified by a professional. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.
- Financials Industry
- interest rate