Should I Get A 15 Year or 30 Year Mortgage?
This past year has continued to be a time of new lows in mortgage rates; the 30-year fixed-rate mortgage averaged below 4% for last year (2016), setting a new all-time record lows. The 15-year fixed rate also averaged at historic lows, under 3%. With these super low rates, should you consider the difference in a 15-year or 30-year mortgage?
In 2017, rates are projected to go toward the mid- to upper-4% range. Even so, these are still super low rates historically.
There are many choices in mortgage products today, not just the 30-year mortgage and a 15-year mortgage. When rates are so low, many buyers can take a second look at something other than the typical 30-year mortgage. Many buyers, after seeing the list of mortgage rates, wonder, should I get a 15 year or 30 year mortgage? Good Question.
What is the difference between the 15-year mortgage and the 30-year mortgage?
Besides the obvious pay-off being half the number of years, the difference between the two is mostly experienced by home owners in the monthly mortgage payment. An example of a $300,000 home:
Sample Scenario of two $300,000 mortgages:
|$300,000 Home||Monthly Payment|| Life of Loan
||Total Interest Paid
|30-year-fixed mortgage = 3.5%||$1,347||$484,968||$184,968|
|15-year-fixed mortgage = 2.8%||$2,043||$367,741||$67,741|
|% Difference||48% higher payment||24% savings||63% savings|
You can use this handy mortgage calculator from Bankrate to see the difference in the two mortgage products. You can see that this 30-year fixed mortgage has the advantage of more reasonable payments, while the 15-year fixed mortgage is geared towards long-term savings overall.
The choice between a 15-year or 30-year mortgage comes down to your comfortable monthly tolerances. Some people tell me they don’t want to be “house poor”, or to say they don’t want to have only a little left at the end of the month after paying their mortgage. The 30-year fixed mortgage is the tool that will give you the lowest monthly payment possible by stretching out those payments over 30 years. The cost is more money payed to interest over those 30 years.
With a 15-year mortgage you are paying more towards the balance each month than you would with a 30-year mortgage. Some people live comfortably with higher mortgage payments and less expendable income. Some people buy well below the maximum of what they can afford, using a 15-year mortgage. There is an advantage to having your mortgage paid off in 15 years. The caveat to this payment arrangement is that your tax write-off will be less with a lower amount going toward interest each month.
It’s a lifestyle choice. It’s a subjective choice.
Paying Off Other Things
Part of the decision of which mortgage to choose is the consideration of other obligations you may have. If you have other debts with higher interest rates, you may want to consider paying those first, saving money in interest and payments the long run. In our example, the $700 extra you’d have each month by choosing a 30-year mortgage could be used to pay down debt.
Another consideration is the choice of investing that $700. Could you invest somewhere with a greater return than in your home? Using this IRA Investment Calculator from Bankrate, you would have $147,884 in your IRA after investing the maximum $5,500 a year for 15 years. (Subtract the $67,000 you might have saved if you had a 15-year mortgage and you’re still ahead.)
***This is where our DISCLAIMER goes…we are not financial advisers, we are REALTORS. We’re just raising questions for you to ask your accountant or financial adviser.***
Colin Robertson writes a very informative blog, The Truth About Mortgage, with 6+ years of news about the mortgage industry. He has some great charts to compare the payments with different interest rates. Use his handy charts to compare rates: [click to enlarge]
“Should I Get A 15 Year Or 30 Year Mortgage?” It’s nice knowing you have choices, right? Knowing the numbers helps in making the choice.
Thanks to The Truth About Mortgage for these excellent interest rate charts! Be sure to read Colin Robertson’s blog for great information about mortgages.
Colin makes some other points that make sense when you consider them, but might not think about at first:
- It is also possible to choose a rate for a 15-year mortgage.
- The lower the interest rate, the smaller the difference in monthly payment. As rates move higher, the difference in payment becomes more substantial.
- Higher mortgage rates are more damaging to larger loan amounts. If you look at the 30-year chart, the payment on a $400,000 loan amount at 3.50% is cheaper than the payment on a $300,000 loan at 6%.
- Remember, this chart shows principal and interest only. There are often other items to consider, like Mortgage Insurance, property taxes and homeowners insurance. HOA fees and condo fees can also add to the monthly amount you need to consider.
Check out Colin’s blog for more great information. Another good read for those who want to dive deeper: learn how are mortgages calculated.
Thanks, Colin, for these useful charts!
The Highland Group
Chris & Karen Highland cell 301-401-5119
eXp Realty 410-777-5714