At some point during their search for a 15 year mortgage, many prospective borrowers may receive advice similar to this:
“Just get a 30 year home loan and pay extra on it each month.” The reasoning behind this idea usually alludes to the financial emergencies that can befall homeowners at any time: “You only have to make the regular payment if an emergency comes up.” While this is true, there are a few things to consider when deciding if making higher monthly payments on a 15 year mortgage is worthwhile.
Lower Fixed Mortgage Rate and Mortgage Insurance
Interest rates for 15 year mortgages are typically lower than comparable rates for a 30 year mortgage. A 15 year loan reduces the lender’s risk, so it costs less. If your mortgage requires mortgage insurance (MI), the premiums on 15 year loans are generally lower than those of 30 year loans. Keep in mind that advertised mortgage rates are typically the very lowest rates available; it is worthwhile to shop and compare mortgage quotes from competing mortgage lenders.
Achieve Freedom from Mortgage Payments Sooner
A 15 year mortgage amortizes faster, which means that more of each payment is credited toward the mortgage balance than with a 30-year home loan of the same amount. A 15 year mortgage provides the benefits of a mortgage-free lifestyle faster. Early retirement, world travel and home renovation are a few possibilities.
Save BIG Money
It’s possible to save thousands of dollars on interest paid over the shorter repayment term of a 15 year mortgage. Here’s a comparison using a 15 year home loan and 30-year home loan of the same amount and same fixed mortgage rate. Remember, the actual rate for a 15 year mortgage is typically lower than for a 30-year mortgage; this would increase the estimated savings shown below.
30 year mortgage:
Mortgage amount $300,000
Fixed interest rate 3.750 percent
Monthly P&I payment $1,389.35
Total interest paid over loan term $200,164
15 year mortgage:
Mortgage amount $300,000
Fixed interest rate 2.750 percent
Monthly P&I payment $2,035.86
Total interest paid over loan term $66,456
Potential Savings $133,709
It’s difficult to ignore the math here, but here’s one more thing to consider. Taking out a 30 year mortgage for the sake of lower required payments may make sense, but there is the minor detail of self-discipline; it can be difficult to commit to paying more than required each month, especially when the hot water heater blows or your friends are all vacationing in Europe. Paying extra on a 15 year mortgage does reduce cash flow, but for those able to swing higher payments, the benefits of a 15 year home loan outweigh the inconvenience.