There seems to be a never ending debate as to which mortgage term is better. Is a 30 year fixed rate mortgage better than a 15 year fixed rate mortgage? People have different reasons for stating why a 15 year mortgage is better than a 30 year mortgage but in my opinion 15 year mortgages are stupid and in this article I’ll explain why.
For the most part the difference between the interest rates in a 15 year mortgage compared to a 30 year mortgage will be around .50% meaning that if the going rate on 30 year fixed rate mortgage is 4% the rate for a 15 year mortgage will be around 3.50%. Let’s take a look at a $200,000 15 year mortgage fixed rate mortgage at 3.50% and compare the same $200,000 mortgage on a 30 year term with a rate of 4%.
Loan Amount – $200,000
15 Year Fixed rate
Rate of 3.5%
Payment Amount = $1,429.77
Loan Amount – $200,000
30 year fixed rate
Rate of 4%
Payment Amount = $954.83
The difference in monthly payment is $474.94 less per month on a 30 year mortgage versus the 15 year mortgage. If you applied the $474.94 difference your 30 year mortgage would be paid off 12 year and 6 months faster meaning your 30 year mortgage would actually be a 17.5 year mortgage. Sure I know what your thinking….aren’t you paying an extra 2.5 years? Of course but at least your not locking yourself into a much higher payment. Using the same loan in Loan #2 but providing yourself with a 15 year amortization schedule your monthly payment would be $1,479.38 or $49.61 more per month. Pretty much $50 per month…probably less that what you pay for your cell phone or cable bill.
As of this posting the average length for a family stay in a home is approximately 7 years or 84 months. If you purchased a home today and stayed for 7 years or 84 months and decided to sell your payoff amount on the 15 year mortgage would be approximately $118,484 whereas the approximate payoff amount on the 30 year mortgage the same 84 months later would be $171,738 a whopping difference of $53,284! However in that $53,284 difference between the two loans you would have paid an additional $38,894.36 for an actual net difference of $14,389.64 over 7 years or approximately $2,055 per year. Going a step further if you were to take $1,500 per year and invest $1,500 each year for 7 years that investment be worth approximately $14,800 leaving you cash positive each year of approximately $555 or $3,885 over the same 7 year period.
If you can’t tell by now the primary reason why I feel 15 year mortgages are stupid is because no matter how you slice it or dice it you are coming out of pocket much more leaving you with less financial flexibility. However, the reason why I feel that so many favor 15 year mortgages is because most people don’t have the financial discipline to come up with a mortgage plan and stick to it. Most people as in 97% of people according to the FDIC! Unfortunately in this day and age it seems that more and more people are incapable of thinking outside the box.
I have been and always will be a fan or pre-paying loan debt. Let’s face facts…..unexpected expenditures are going to happen. Your car may breakdown you may need to make an unplanned repair to your home or a variety of things. Using the 2 above loans again wouldn’t you prefer to have the extra $474 per month if you needed it. Heck you could even back the $474 per month and make a lump sum payment to your mortgage to get the benefit.
Perhaps it’s just me but I’ll never take a 15 year mortgage. How about you? Do you agree or disagree with my article on 15 year mortgages being stupid?