15 vs 30 Year Mortgage

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Pay Yourself Instead of the Bank

Would you like to be mortgage-less before retirement, or maybe before your children start college? Maybe you would just like to save a whole bunch of cash over the course of your mortgage, perhaps a $100,000, or even more? The 15-year mortgage must be considered over the more traditional 30-year mortgage.

If you think you cannot afford to pay off your mortgage in half the time, you may be wrong. Although the monthly payments are a little higher on a 15-year mortgage, the interest rate is also a little lower versus the 30-year. This partially offsets the increase in the monthly payment. See the illustration at the bottom of this page.

The important thing is that you pay less than half the interest over the life of the loan versus a 30-year loan. For every $100,000 you borrow for 30 years at 6% you will pay the lender over $215,000 ($100,000 principal loan amount and $115,000 in interest); if you are able to take on the higher 15-year mortgage payment, it is definitely worthwhile. For most people, this is the biggest opportunity they will ever have to save a very large sum of money.

Could you achieve the same by putting the payment difference in a savings or money market account to accrue interest? If you saved the $193 payment difference every month without fail over a 15-year period and put it in an interest bearing account earning 3% interest, your money would grow to $47,495. This is less than half what you would save with a 15-year mortgage.

In reality, this is not as simple as it sounds. There are other issues we have not considered, such as paying less interest will reduce your tax deduction. If you are in the 33% tax bracket, you would save 33 center per dollar of all interest paid, but you are still paying 72 cents in interest to a lender. Tax saving or not, savings 72 cents versus saving 33 cents is a no brainer.

The real issue is twofold, most people: 1) do NOT have the discipline to consistently save the difference (in this example, $193) every month and never tap into it for 15 years, and 2) do NOT have the ability of earning the same or better interest rate on their savings. Keep in mind that the government will be taxing any interest earnings you receive on the savings.

Under certain situations, a 15-year mortgage will be more beneficial than a 30-year mortgage.

Note: The higher the interest rates, the more dramatic the savings in a 15-year mortgage versus a 30-year mortgage. In 2000 to 2005, we have seen some the the lowest mortgage rates in 35-40 years. However, if rates were to go back to the say the 9.50% level, the payment for a $100,000 mortgage would be $840 per month and the total interest paid over a 30-year loan would be $202,707. The same amount of money borrowed over 15 years at 1/2% lower rate (remember, 15-year rates are usually about 1/2% lower than 30-year rates) would result in a monthly payment of $1,014 and total interest paid of $82,567, a savings of $120,140! What are the chances you or most human beings saving this amount in 15 years, given the innumerable demands on our finances today?

15-Year Mortgage Benefits

You build equity much faster
You own your own home in half the time
You save 55% of the interest versus a 30-year
Lower interest rate than 30-year

30-Year Mortgage Benefits

Best if you plan to live in your home for only a few years
Lower monthly payment

Comparison: 15-year vs a 20, 25 & a 30-year loan.

	15-Year	20-Year	25-Year	30-Year
Loan Amount	$100,000	$100,000	$100,000	$100,000
Interest Rate	6%	6%	6%	6%
Monthly Payment	$844	$716	$644	$600
Interest Paid	$51,894	$71,943	$93,920	$115,838
Interest Savings	$63,944	$43,895	$21,918
Note: 15-year loans have a lower interest rate than 30-year loans, which means that you would save even even more interest than shown.

The 15-year mortgage may or may not be right for you, but it's worth considering.