Coming up with the down payment on a home can be hard enough, and one way to make a home more affordable is to spread out the mortgage payments over 30 years.
But 30 years can be daunting, and that time can be cut down with a 15-year mortgage. It’s a lot more expensive in the short-term than a 30-year fixed-rate mortgage, but pays off through greater long-term savings.
Here are some things to consider when weighing a 15-year vs. 30-year mortgage:
It can be difficult to see the long-term benefits when looking at a monthly mortgage bill that will be 50 percent higher over 15 years instead of 30.
Paying a home loan off in half the time requires a larger payment, of course, but it can save you tens of thousands of dollars in interest charges. Why? Not only is more principal paid earlier, but interest rates on 15-year mortgages are usually better than other loans types.
Here’s an example of a $200,000 mortgage at 30 vs. 15 years:
Mortgage type: 30-year 15-year
Interest rate: 4.5 percent 4 percent
Monthly payment: $1,013 $1,479
Total interest: $164,813 $66,288
That’s almost a savings of $100,000 by going with a 15-year loan. Divide that savings over 15 years and it’s about $555 saved per month.
Borrowers should make sure they have enough income to afford it, are able to manage their household debt and have money in liquid savings for emergencies.
Repaying a mortgage faster not only saves you money in the long run, but you build equity in your home faster, too. If home prices rise, your equity could grow as well.
This is good for many reasons, including making refinancing easier by lowering your debt-to-income ratio. While it won’t improve your cash flow, it should make it easier to get approved for a home equity loan or home equity line of credit.
An Easier Retirement
Another big advantage…if you plan to retire in the next 10 to 20 years, you won’t have to worry about mortgage payments during your retirement. Instead of a house payment, you can use that money for retirement expenses.
If you continue paying a 30-year mortgage into retirement, you may have to pull money out of your savings to make the payments.