Whether they are purchasing a new home or refinancing an existing home, borrowers often ask Mark Wells at Preferred Financial Services whether a 15-year mortgage is a better choice than a 30-year mortgage. Here, he answers some of those questions.
I know that I will be paying more interest with the 30-year loan. How much more?
That will differ according to your loan size, but for a $175,000 loan the interest paid on a 30-year term would total $126,000. For a 15-year loan it would be $46,000.
I have heard I can save the same amount of interest by taking a 30-year loan and
making a 15-year payment on it.
You can pay your 30-year loan off in 15 years, but the interest rate on a 30-year note is usually 0.5–0.75 percent higher, so you will still pay a bit more interest on the 30-year loan even if you pay it off in 15 years.
So it’s a no brainer: The 15-year fixed rate is a lower rate, and I save $80,000 due to the lower rate and by paying the loan off faster. Why would I not do this?
The 15-year payment is higher, so you need to make sure it doesn’t strain your budget. Since the interest on either loan is tax deductible, the actual cost of borrowing your money is only around 2 percent per year. Some financial planners advocate taking the 30-year loan and investing the difference between the 30- and 15-year payment in a vehicle that will earn more than 2 percent. If you stick with this plan, you could accumulate enough in your investment account to pay off your loan with a lump sum in less than 15 years.
So I should do the 30-year loan?
You need to ask yourself if you will truly be financially disciplined enough to put the extra money into the investment account. Missing even a few months’ savings in the early stages can throw your accumulation off significantly. Sometimes the “forced” discipline of the 15-year loan guarantees you will accomplish your savings.
So now I’m back to the 15-year loan as the best option?
There is no right or wrong answer to this. Many self-employed borrowers take the 30-year note and make a 15-year payment when they can. This gives a little security in case their income drops for a few months. Others know they have a hard time paying into an investment account consistently, so they take the 15-year loan knowing it will “make” them save. Your mortgage
broker can easily lay out the options so you can choose the best route for your family.
Wells welcomes any comments or questions and
can be reached at 864-235-9596 or via email at
Mark@TheGreatestRates.com.
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