Jun 21, 2010

Why You Want a 15 Year Mortgage (Carole)

There are 4 excellent reasons to have a 15 year mortgage:

1.  You will build equity in your house much faster, since each monthly payment has a larger percentage of your money going toward the principle.

2.  You will own your house (FREE AND CLEAR) in 15 years.  You'll be amazed at how quickly 15 years passes in your adult years.

3.  You will save tens of thousands of dollars in interest on a 15 year mortgage compared to a 30 year mortgage.  More about this in a minute.

4.  Interest rates are typically .5% lower on a 15 year mortgage.

Take a moment to visit a mortgage calculator .  Type in your own mortgage information (full amount of your loan and interest rate) using a 15 year time line and then do it again with a 30 year time line.  Have the calculator figure out your amortization schedule and scroll down to the bottom to see how much interest you will have paid to your lender over the life of your loan.  You'll see that even though your monthly house payment will go up a bit with the 15 year mortgage, you will save more than HALF of the interest $ you would have paid with a 30 year loan!

Here is an example:

30 year mortgage on $150,000 at 7% interest.  Your monthly payment would be $1097.75.    During the 30 years that you pay on your loan, you will pay your lender $209,263.35 in INTEREST.  (This means you will have paid way more than double the original price of your house).  Ugh.

15 year mortgage on $150,000 at 7% interest.  Your monthly payment would be $1348.24.  During the 15 years that you pay on your loan, you will pay your lender $92,683.63 in interest.  So even though your monthly payment went up by $250.49, your overall savings on this loan is $116,579.72.  Fantastic!

Yes, you can do this on your own by getting a 30 year mortgage (with the lower monthly payment), but paying at the 15 year payment rate.  This plan gives you wiggle room if you ever hit some hard times and need a lower monthly payment to fall back on.  Just make sure you're the kind of person who is very disciplined and will keep to the 15 year schedule.

Remember, housing is one place you want to be very, very careful with your money.  Your ability to save yourself hundreds of thousands of dollars is very real.  Take the time to do your homework -- and reap unbelievable rewards.


Heather said...

Great post! My husband has just been lobbying for a 15 year mortgage on our next home. Thanks for putting this together.

Mary said...

What a fantastic idea! And a couple hundred more a month seems so doable.

My question would be, if we have current debt (credit card, student loans, etc.) should we pay those off first and then work on a 15 year mortgage plan?

Carole said...

Always pay off consumer debt first (car, credit card, student loans). They typically have a much higher interest rate and there are no tax benefits for keeping them.

Good question!

Nathan Pralle said...

Yeah, I think the correct layout for this is, "If you have EVERYTHING ELSE paid off in terms of debt, THEN think about a 15-year mortgage."

Really, it's one of the lowest interests rates besides perhaps school loans that you're ever going to get in your life, on something that will (most likely) appreciate. I would never urge any younger folk (like myself) to engage in a 15-year mortgage unless you absolutely knew you weren't going to need that extra dough later for kids, another car, one of you having to stay home instead of working, etc.

I prefer to have my 30-year and toss some extra money at it when I'm feeling extra generous, but that's it. There are other places where my money is better used right now (more significant debt) than to pay down such a solid asset. (I do, however, always round up my monthly payment to something round. It's only a few bucks but makes the numbers neater, and I suppose it saves a little bit here or there.)

Another option for people to look into is offered by some mortgage dealers, such as mine (CitiMortage), and that's the bi-weekly payment plan. You make a 1/2 mortgage payment every 2 weeks instead of once a month. The end result is you end up paying an extra mortgage payment once a year. It's not a LOT more, but it's working ahead a little bit. Unfortunately, for someone like us who gets paid twice a month, paying a big payment like that once every two weeks would just mess with our budget in ways I can't begin to fathom.

Packrat said...

This is so true! Nobody (even in finance classes in high school and college!) ever told my husband and me this until we already purchased and sold two homes. In the 15 or so years, just think of the money we would have saved/made! So much of the first 15 years of payments go to interest that it is incredibly discouraging. A shorter term mortgage and "throwing" as much extra towards the principle each month will save thousands of dollars. Reminder: Just be sure to check the fine print in your contract for penalties for doing this - especially if you financed using a low income loan. If your contract does have penalties,you may want to consider refinancing with another company. (See Carole's earlier post.) The money you spend refinancing may save you in the long run.

My Well Calculated Life said...

Great post! My fiance and I are looking to sell his house and buy a house together and we will definitely be trying to do this.

The Liddells said...

We have a 30 year mortgage on our house, but do pay it to where we will have it paid off in 16 years (yes, not 15). We have it automatically come out of our account that way so we don't try to pay less. I do think it's nice, though, just in case we ever go through a rough patch, we have a little wiggle room.