First Person: The Benefits of a 15-Year Mortgage

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According to a recent article on MSN Real Estate, 20-year mortgages may be getting somewhat trendy now. I've been a long-time fan of shorter mortgages. Even with mortgage rates at an all-time low, I still like the idea of paying off a mortgage faster. While being able to do so may depend upon current debt load, income, job, or living situation, getting a mortgage paid off and owning a home outright can feel like a huge financial weight has been lifted. And I ought to know since our family started out with a 15-year mortgage on our first home and currently have no mortgage at all on our second.

Here are a few of the main reasons why we chose a shorter-term mortgage and how it paid off for us.

Rate Differential

At the time we obtained our first mortgage, interest rates were hovering around 6.5 percent for a 30-year mortgage. We were able to lock in our 15-year mortgage for about 5.7 percent. While this differential might not seem like much, it equated to tens of thousands of dollars over the course of the loan payoff period.

While mortgage rates have dropped since then, such a difference in rate can still equate to big saves. Often there can be a spread of .5 percent to 1 full percentage point difference between a 15-year mortgage and a 30-year mortgage, which can mean huge savings for a home owner.

Interest Paid over Time

While we didn't stay in our home for the full length of our loan period, had we done so with our 15-year mortgage versus a 30-year mortgage, the difference between the two in the amount of interest we would have paid would have been substantial. By using a mortgage calculator like the one found on mortgagecalculator.org, I can in fact see that the difference would have equated to about $130,000 extra dollars in interest should we have taken on the higher rate 30-year mortgage as opposed to the 15-year option.

And even though we sold our home at a loss, the higher equity we had built through our 15-year mortgage during the years that we were there helped us put some of that equity toward buying our next home outright, in turn saving us even more in mortgage related costs.

Time to Focus on Other Goals

With our 15-year mortgage plan, we wanted to get our loan paid off quicker so that we could focus on other savings goals afterward. Our plan was to have our mortgage paid off in full just a few years in advance of our first child heading off to college. This way, we could focus on putting the money that we had previously been paying toward our mortgage toward college savings for several years, and then put it toward college costs directly once our son started school. After getting the kids though college, we could then transition to putting this money toward retirement savings rather than spending it upon interest for a longer-term mortgage.

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Sources:

Lerner, Michele. MSN Real Estate. "20-year mortgage: Getting Trendy?" http://realestate.msn.com/20-year-mortgages-getting-trendy. October, 15, 2012.

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