The Majority of Home Buyers Opt for a 30-year Mortgage. Should you?
Why do 86% of home buyers choose a 30-year mortgage over a 15-year mortgage?
Even though a 15-year loan will carry a lower interest rate, and cost about 48% less over the long term than a 30-year loan, most borrowers look at the short term and choose the lower monthly payment.
Here’s how it looks in actual dollars and cents:
Say you’re purchasing a $250,000 home and putting 20% down. Your new loan will be for $200,000. Interest rates fluctuate from day to day, but we’ll say a 30-year mortgage comes with 3.68% interest and you can get a 15-year mortgage for 2.69%.
- $200,000 at 3.68% over 30 years will bring your principal and interest payment to $918.31.
- $200,000 at 2.69% over 15 years gives you a payment of $1,351.54.
That’s a hefty difference in a homeowner’s monthly budget. You could use that $433.23 per month difference to buy new appliances, go out to dinner more often, or even save for a vacation. Or – just save it.
But look at what it will cost:
- $918.31 paid over 360 months (30 years) comes to $330,591.60.
- $1,351.43 paid over 180 months (15 years) comes to $243,257.40.
That’s a difference of $87,334.20.
The lower payment does give a measure of security against a day when you might not be able to afford the higher payment. So if you worry about a future job loss, illness, or fluctuating income, you may want to opt for the smaller payment and put the difference aside as a safety cushion.
Perhaps you know you won’t be staying in the house for 30 years, or even 15 years.
If you’re thinking that you’ll want to move in another 10 years, consider the impact on your loan payoff when you sell the house.
- If you opted for the 15 year payoff, your unpaid balance will be approximately $75,796.
- If you opted for the 30 year payoff, your unpaid balance will be $155,842.
Paying that extra $433.23 per month for 10 years (120 payments) will “cost” you $51,987.60 and reduce your loan payoff balance by $80,046. That’s a savings of $28,058.40.
If opting for a 15-year mortgage is too frightening…
Although you’ll be paying a little higher interest, you can do what young man of my acquaintance does. His monthly payment is $745, of which $237 goes to principal. By writing a check for an even $1,000 each month, he’s paying an extra $256 toward the principal and effectively more than doubling his payments during the early years of the loan.
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