If you read my previous article that compared the historical mortgage rates to what they are currently, you may have noticed that I used a 30 year mortgage term in order to make the comparison. To be quite honest though, through much of my research regarding home loans, I always advise home-buyers to choose the 15 year mortgage.
Choosing a shorter term on your mortgage does have its disadvantages:
· You may not be able to qualify for your “dream” house
· The monthly payments are higher
Those are honestly the only disadvantages I can think of. Here are some advantages of the shorter term loan:
· You will pay off the loan 15 years earlier
· The rate is typically much less
· You will save a lot of money
· You may be able to retire sooner because you will be debt free
I have performed some quick calculations in order to show you the benefit of the shorter term loan. Take a look at the graph below.
- 30 year loan rate = 4.40%, payment of 1001.52, total payment of 360,547.86
- 15 year loan rate = 3.68%, payment of 1447.51, total payment of 260,551.65
As you can see, with the 15 year loan the total amount paid is approximately $260,000. With the 30 year loan the total amount paid climbs to about $360,000. Clearly, it is much more beneficial to pay off the house in 15 years.
Now let’s dig a little deeper so that I can prove my point. If you take a look at the 15 year mark, the lowest term is obviously all paid off, and the house is yours free and clear. But, if you focus on where the 30 year mark is, can you see how much you still have to pay off? At this point, you still have $180,000 to go on your house that is valued at $200,000. Isn’t that awful?
Hopefully this quick explanation has been enough for you to choose that 15 year loan on your next house. If you heed this advice, I promise you won’t be sorry.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.