Why a 30-year mortgage beats a 15-year
You have the flexibility to pay off a 30-year mortgage in 15 years, if you want. Here's what it would cost you.
This post comes from Len Penzo at partner blog Len Penzo dot Com.
When it comes to the great mortgage debate, I've already explained my position regarding 15- and 30-year loans: The 30-year loan is better for a multitude of reasons. In fact, I think it's a no-brainer.
When I bought my first home in 1990, interest rates were in double-digit territory. Today, 30-year loans make more sense than ever with mortgage interest rates continuing to set new all-time lows. In fact, last week, a person with excellent credit could get a 30-year loan for rates as low as 3.375% and 15-year loans for an incredible 2.75%.
So why is the 30-year mortgage a better choice? One of the biggest advantages is its flexibility. After all, holders of 30-year loans can always make the extra payments required to pay them off in 15 years, should they choose to do so.
However, the poor guy with a 15-year note who suddenly gets laid off or runs into other unexpected financial difficulties can't reduce his payments in order to stretch that 15-year mortgage into a 30-year loan. Sure, he could try to refinance, but that can be difficult -- especially for the unemployed.
Of course, the trade-off for having additional flexibility is higher interest payments. (Post continues below.)
Assuming a $200,000 loan, the impacts of those higher interest payments over time at today's rates can be seen in the following chart:
Obviously, folks with a 30-year mortgage are going to pay more interest, whether or not they make the extra payments required to retire their loan in roughly 15 years. Then again, how much more depends on how picky they are about getting the loan paid off in exactly 15 years.
In my example, a 30-year $200,000 mortgage at 3.375% results in a monthly payment of $884. Over 30 years, the homeowner would end up paying $118,309 in interest to the lender -- $74,000 more than a homeowner with a 15-year loan at 2.750%.
However, those who are truly serious about minimizing their interest costs by paying off that same 30-year loan in exactly 15 years could do so by increasing their monthly payments to $1,424 -- $540 more than the minimum payment.
Over the life of the loan, that strategy would result in interest expenditures of only $10,491 more than the 15-year mortgage. Spread out over 15 years, it's a premium of just $58 per month. Not bad at all for those looking for the added peace of mind.
Alternatively, faithfully making monthly payments over the life of the loan equal to that required by a 15-year mortgage at 2.75% ($1,357) would result in slightly higher additional interest costs of $14,330. That's a premium of $74 per month over the life of the loan, which would be a bit longer -- 15 years, 11 months.
So there you have it. Hopefully, this little example provides you with a bit more insight into just how much extra it currently costs to take on a 30-year loan over its 15-year cousin.
As you can see, no matter how you slice it, people who prefer the numerous advantages of a 30-year loan over a 15-year mortgage are always going to pay more interest. But for those who are looking for the extra flexibility of a 30-year loan as a hedge against a sudden loss of income, the added premium is a relative bargain.
More on Len Penzo dot Com and MSN Money:
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well, the author may have the 'book learning,' but take it from an older guy...it makes more sense to pay off the house and get our from underneath the debt. if you or your spouse lose a job, there is no fear of losing a place to live. extra money monthly after house is paid for is awesome:) and your net worth obviously increases because you OWN the house. pay it off......
The writer is a moron, this is why Americans are so financially screwed. By listening to people like this!
A 15 year note saves you over $10k in total interest over the life of the loan. Buying a house you can't afford with a 15 or 30 year note is what got us in this situation in the first place! If people bought what they can afford, and working your way up to a larger house in baby steps, while reinvesting any equity as a down payment each time, is the tried and true method of owning real estate.
Our problem is we all want intant gratification!
I am amazed at the number of negative comments on this article. There's one basic premise here, which is THE FUTURE IS UNPREDICTABLE. There are a lot of people commenting like they know exactly how much money they will be making in the future (i.e. the 15 year is better), which is nonsense. Do you have guaranteed health, a guaranteed job, and a guaranteed salary for the next 15 years???? If not, then a 30 year with a lower payment is your safest bet.
I took on a 30 year loan, and paid it off in only 8 years. I thought, at best, I would be able to do it in 15 years. I had no idea my house would increase in value by over 80% in just a few years, and then come most of the way back down. I had no idea the dow would drop by almost 50%, and then recover most of the way. THE FUTURE IS UNPREDICABLE, plan for it by being conservative.
I'm paying a 15 yr mortgage as if it were an 8 yr loan. Does that make it twice as good as paying a 30 yr in 15?
Its simple math to me - pay off as quickly as you can while paying the least amount of interest < yrs < interest = best end result. Why does the author make this concept so hard?
Where do they get these people to write these things? Basically this guys tells you right off the bat that getting a 30-year mortgage is a 'no brainer', then he spends the rest of the article telling you how to pretend it's really a 15-year mortgage, although it'll never really be as cost-effective as one. My wife and I just refinanced for a 15-year mortgage, and it's one of the best decisions we've ever made. Unless you are the most disciplined person ever, you'll never be able to pay an extra $500 a month each and every month for the life of your 30-year mortgage. We knew this all too well, and also knew the only way we were going to be able to pay off our mortgage in 15 years was to, well, get a 15-year mortgage. Duh. We will ultimately save over $180,000 in interst over the life of the loan, and our monthly P&I payment is less than $180 more than our old 30-year mortgage monthly payment. Now I think that's a no-brainer, don't you?
Are you totally out of your mind?
You are obviously a Mortgage Slave Trader.
The best advice: be like me, NO MORTGAGE.
I saved money first, and then bought my house.
ZERO debt. but 100% discipline.
saved money for 12 years. My average family income is below 50K.
After 12 years (-being an immigrant arrived in the USA with NOTHING-)
we had 180,000. Bought a forclosure. The rest is history.
Freedom is GREAT!
But maybe one needs to be an immigrant for that.
I'm replying to the person who cannot do simple math and referred to me as the moron. Apparently myself and the the majority of people disagree with you!
Like I said, if people lived and spent within their means, and quit living from hand to mouth, they would not be in a serious situation if something were to happen. It's called a budget! My wife and I worked very hard throughout our life, we practice what I preach. I have zero debt, everything I own is paid for, house, cars, etc...0 credit card debt. We did this by budgeting for a 1 income lifestyle even though both of us worked, this way if one of us lost our job, the bills got paid!
I'm 54 years old, putting 1 child through college, and I will retire in 3 years, without a pension. My wife has not worked for 8 years, our choice since the house was paid off. We did this with High School educations, old fashioned American ambition, and simple financial common sense.
BTW we got our money the old fashioned way, we earned it!
Besides the lower interest rate the another advantage of a 15 year mortgage is the phycology of it. I mean sure you may intend to pay your mortgage off in 15 years anyway, but will you really do it? I mean I know plenty of people who took advantage of rising house prices to actually refinance and take money out. Some of those people are hurting now. A 15 year loan (if you can afford it) is just one more thing that forces you to make tougher decisions. I’m not saying everyone should take a 15 year loan over a 30, but I don’t think it’s so cut and dry as the article would make you believe. Early on I focused on paying off my house and now am doing a lot better than most of my friends.
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