15 Year Mortgages

Should You Choose a 15 Year Mortgage Rate?

At first glance, anyone that might consider taking on a 15 year mortgage might find the notion not only a logical choice, but a reasonable option as well. While the monthly payments are indeed larger, the obvious end-game results in the homeowner being able to pay off the mortgage in half the standard time of 30 years. In addition, there is the added benefit of pocketing a considerable amount of money saved on the interest payments over the shorter duration of the loan’s term, which can be re-applied toward many different investment options.

Before moving forward with this option, there are a few negative aspects to consider when deciding if a 15 year mortgage is indeed possible, or if a prospective homeowner’s income and budget parameters can absorb the impact. The primary factor to be weighed in this important decision is of course the hefty monthly payment. For the purposes of illustration, it might be wise to review a hypothetical breakdown of the 15 year mortgage payout versus the 30 year payout. If it was assumed that a current mortgage rate of 5.26% is applied for a 30 year fixed rate mortgage, and, a corresponding 4.78% interest rate is applied for the 15 year mortgage, the payment comparison would be approximated as follows:

Monthly payments: $1,948 vs. $1,382 = $566 per month more for the 15-year loan
Total payments: $350,721 vs. $497,540 = $146,819 more over the life of the 30-year loan
Total interest: $100,721 vs. $247,540 = $146,819 more over the life of the 30-year loan

As is revealed in this comparison, and under these particular loan terms, the monthly repayments indicate a 40% increase in the 15 year loan over the 30 year loan, while the total repayment amount for the 15 year loan are just about 30% less than the 30 year loan. A substantial monetary savings of about $147,000 is realized by implementing the 15 year mortgage option, which is a considerable sum of money that could be utilized in many different and productive ways.

While this comparison reveals a substantial and highly favorable side to the 15 year mortgage option, the potential borrower needs to realize that there is a large increase in monthly repayment expense which represents a lesser amount of budgetary flexibility for handling any unexpected financial situations. These variables could be a loss of income, unemployment, long or short-term medical emergencies, or even an increase in dependents as the family grows. It could also mean a loss of opportunity for any circumstance requiring an input of funds for investing, such as a business venture, or even improvement or upgrading of the home itself.

One additional factor in considering the 15 year mortgage option is the mortgage interest tax deduction, which certainly could affect the overall decision-making process. Simply put, the lower interest paid out on the 15 year loan equates to the homeowner having less to deduct at income tax time, making it perhaps a relatively less favorable option in the long run. There is also the rule of thumb regarding the long-term affects of inflation that states that payments made during the later years of a mortgage will be lower in “real” terms than at present, since prices, as well as incomes, have a tendency to rise over the life of any mortgage. Therefore the 15 year mortgage is less affected by inflationary factors due to its shorter duration.

The proverbial bottom line when considering the 15 year mortgage option is to simply examine the basic mathematics involved. There are numerous mortgage calculators available to scrutinize each variable and repayment option. In the end, and with the numbers in hand, weighing the pros and cons of mortgage types is most beneficial to the homeowner becomes far more practical, and certainly much clearer, and easier to integrate into whatever financial plan suits their particular long-term needs.

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