October 29th, 2014
When you went to buy a home, chances are pretty good you needed a mortgage to help finance that purchase. This means you were offered either a 15 or 30 year mortgage and the chances are also pretty good you went with the latter because that came with lower monthly payments. Most people do the same. However, the 15 year mortgage will mean paying off your home in half the time and for less, because you’re accruing less interest.
An Example of 30 Years vs. 15 Years
To help you visualize the difference you could save between the two, let’s use a hypothetical situation. Let’s say that the mortgage you needed was for $200,000. Aside from the interest rate, which we’ll address in a moment, you also need to think about inflation. For our example, we’re going to assume that it will be 3% over the course of the life of your loan.
Alright, for a 30 year mortgage, let’s put your interest rate at 7%. For the 15 year mortgage, we’re going to say that your interest rate is 4%. However, this also means you’re paying more a month for the 15 year mortgage. Monthly payments for the 15 year mortgage are going to be $1,479, whereas the 30 year mortgage has you paying $1,331.
You may not think that a little over $140 a month would add up, but the total you’re going to owe back to the bank over the course of 15 years is $214,827 in this scenario. Over the course of 30 years, though, you’ll be paying $317,246. That’s a difference of $102,419!
The Importance of Inflation
No matter how you do the math above for your real-life situation, remember the importance of inflation. Year by year, the dollar essentially weakens, meaning it’s worth less each time you use it. Without accounting for inflation, you won’t get an accurate estimate of how much you stand to save between two different mortgage types.
Paying Your 30 Year Mortgage at 15 Year Mortgage Intervals
Now, some people who already have a 30 year mortgage may just decide they’ll begin paying it off at a 15 year interval. If you’re considering this, it may be because you just came into some money, got a raise or simply now have a better appreciation for how much you could potentially save by doing so.
Obviously, this will save you money over time, because there will be less interest built up. However, it’s also advantageous because, if money winds up getting tight, your real monthly payment is actually a lot less than what you’ve been paying, so you can go back to your 30 year rate until you’re more comfortable financially. On top of that, depending on how regularly you’ve been making your payments, you may also have plenty of breathing room.
Keep in mind, though, this takes a lot of discipline. If you wind up missing enough payments that you’re back needing to make the obligatory payment for your 30 year mortgage once a month, then any savings you were hoping for just went out the window and you’re back to spending more for your home.
Is It Worth Going from a 30 to 15 Year Mortgage?
Ultimately, this question is really one you should discuss with a qualified financial advisor. However, if you can afford the monthly payments, then just revisit the math above to see how much you stand to save. Unless you have a promising investment you want to spend those extra monthly savings on, you leave a lot on the table by opting to take twice as long to pay your home off.