Why A 15 Year Mortgage Will Save You Boat Loads of Cash?
If you are in the market for a new home you might be thinking about what type of mortgage to get. Or, if you already have a home loan, you might be thinking about refinancing. If you have a 30 year loan and can afford a few hundred dollars extra a month, switching to a 15 year loan might be a really, really good idea.
For our example we have chosen a $300k home to compare just what it might look like for a 15 year loan vs a 30 year loan. We are using a 20% down payment or $60k for both examples. Also, we factor in that the 15 year loan will come with a lower interest rate becaue it represents less risk to the bank. OK, so if you are thinking about buying or refinancing you need to see this. Keep reading on the next pages to see the shocking results and what the banks really don’t want you to know.
Loan #1 – 30 Year Loan @ 4.3% Interest
$300K Home – 20% Down ($60k)
Monthly Payment: $1485/mo (This includes taxes and insurance)
Total Interest Paid Over 30 Years: $187,570
Loan #2 – 15 Year Loan @ 3.4% Interest
$300k Home – 20% Down ($60k)
Monthly Payment: $2001/mo (This includes taxes and insurance)
Total Interest Paid Over 156 Years: $66,712
As you can see, switching to the 15 year loan costs you about $500 bucks a month more per month ($516 to be exact), BUT, and this is a big but, you pay off the home in half the time. You save 15 years of payments AND reduce the total amount of interest paid by almost 3X. That means with a 30 year loan you are paying nearly 3 times as much interest or $187,570 instead of just $66,712. That is a big deal. If you can afford the extra each month thing of the long term gain.
Another thing to look at is the fact that you are building equity exponentially faster with each payment and reducing your total interest expense by almost 2/3s. Lets take look at the 15 year month 1 payment – $1,024 is going direcdtly towards your principle and building equity, while $680 is going to interest. By contrast, with the 30 year loan month 1 payment, only $328 is going towards the principle! Almost your entire payment is going to INTEREST and NOT increasing your equity. This of course is the way the banks prefer it. Mortgages are big business for bankers, perhaps the biggest business. If they get you paying almost $1500 a month to have only $328 go to the principle, while $860 goes to interest, who is winning…The banks or you? In this case, the banks are winning BIG TIME!
Most of the time people end these kind of articles by saying a 15 year loan might not be right for everyone. The way we are going to end it is by saying that a 15 year mortgage IS BETTER FOR EVERYONE. If you can’t afford the few hundred dollars etra each month, BUY A CHEAPER HOME. You could save 15 years of your life by reducing the cost of your home to match what you can afford on a 15 year term. You start building immediate equity, and when the time comes to sell, you will be financially right side up right from the begining. So is a 15 year loan a better deal? You bet. Absolutely. No questions asked. A 15 year loan will be the single best financial decision you can make for your family in regards to your home loan.
P.S. if you want to play with the numbers, you can use the free mortgage calculator @ zillow, just change the term and interest rate and then click on the “Full Report” link to see how much interest you will pay over the life of the loan.
Here is the link: