Benefits of a 15-Year vs 30-Year Mortgage
Whether you are about to buy a home or already have a 30-year mortgage, consider the benefits of choosing a 15-year loan or refinancing to increase your net worth.
Compare 15-Year Term to 30-Year
Affordability, Stability and Flexibility are the three reasons home buyers overwhelmingly choose a 30-year term, according to Freddie Mac chief economist, Frank Nothaft. However, for those who can afford a higher payment, there are three additional reasons to choose a 15-year term:
- Save Interest
- Build Equity
- Retire the Debt Sooner
First-time buyers have a higher tendency to use a minimum down payment, and are very concerned with affordable payments. It is understandable that the majority of these buyers select 30 year, fixed-rate mortgages.
Compare Interest Rate and Monthly Payment
Consider a $200,000 mortgage at 30-year and 15-year terms with recent mortgage rates at 4.2% and 3.31% respectively. The payment is $433.15 less on the 30 year term but the interest rate being charged is higher. The total interest paid by the borrower if each of the loans were retired would be almost three times more for the 30-year term.
More of the Payment Applies to Principal Reduction
Another interesting thing about the 15-year mortgage is that more of the payment goes to principal than interest from the very first payment! It would take over 13 years on the 30 year mortgage for the principal to exceed the interest allocation.
If you get a 30-year loan and make the payments as if on a 15-year loan, wouldn’t that have the same result? That would certainly accelerate amortization and save interest. The real challenge is the discipline to actually make the payments on a consistent basis if you don’t have to.
Many experts cite one of the benefits of home ownership is a forced savings that occurs due to the amortization, which most renters simply won’t attempt to duplicate.
Home ownership remains one of the best ways to increase net worth. We’re at your service for all of your real estate needs.