I know there is a lot of talk out there about which is better, a 15 or 30-year mortgage. And I'll be the first to admit that there can be benefits and disadvantages to both. However, having recently had a 15-year mortgage, I can tell you first hand that I really liked it, and I found that -- at least in my opinion -- a 15-year mortgage is better.
It might not seem like a sole percentage point in interest rate would make that much difference in how much is paid on a mortgage over time. But with a recent USA Today article noting the difference between the average 30-year mortgage at 3.81 percent, and the average 15-year mortgage at 2.98 percent (at the writing of this article), a percent difference is about what we have between the two.
So let's take a look at just how much difference this can make over time, and then it will start to become obvious why we decided to choose a 15-year versus 30-year mortgage.
Less paid in interest over time
In our situation, we decided to take out a loan for just over $150,000 for our home. At the time, 30-year rates were at about 6.5 percent and 15-year rates at about 5.5 percent, which is about where our loan rate ended up.
Not factoring in loan charges and origination fees, here is what the difference would be between the two mortgages over the course of the loan using simple mortgage calculators like those at bankrate.com or calmymortgage.com.
Loan amount -- $150,000
Payments - 360
Interest rate - 6.5 percent
Total Interest -- $191,316.73
Loan amount -- $150,000
Payments - 180
Interest rate - 5.5 percent
Total Interest -- $70,612.53
Yes, that's a $120,704.20 difference in interest paid to the lending institution between the two loans. Sure, the monthly payments for the 15-year mortgage are higher, but I'd certainly trade a higher payment for $120,000 in savings.
The "I'll just make extra payments on a 30-year mortgage" theory
My wife is a big fan of the "We'll take on a 30-year mortgage to get the lower payment, and then we can make extra payments whenever we want" theory.
I'll agree with this idea to some extent since taking on a lower payment can leave some wiggle room for unexpected financial events in life that could make a higher payment unsustainable. However, I don't think that many people out there want to or have the will to make these extra regular payments. That's why things like bi-weekly mortgage plans exist, to help those who don't want to or can't deal with making extra payments.
In my mind, if the plan is to pay down a mortgage quicker anyway, I'd prefer to go the 15-year route and push myself, as it seems that if the higher payment is the standard, we manage to make it, where as if the lower 30-year payment was our standard, I have a feeling we'd stick to that rather than push ourselves hard to make a quicker mortgage payoff.
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The author is not a licensed financial or real estate professional. The calculations in this article have not been verified by a professional. The information provided in this article is for informational purposes only and does not constitute legal, financial or real estate advice. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.
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