An Alternative to the 15-year Mortgage
Spring is here, compelling thousands of Americans to consider buying homes. With their considerations come the question, “Is the 15- or 30-year mortgage the correct choice?”
Below is a breakdown of the two options to help with some of these thought-processes.
We begin with these assumptions:
- 15-year fixed interest rate of 2.875%
- 30-year fixed interest rate of 3.5%
- $15,000 down payment
- Affordable monthly mortgage payment of $1000
For the 15-year mortgage homebuyers are looking at a $161,074 purchase price ($146,074 loan plus the $15,000 down payment) and 15-years of interest payments totaling $33,926.31.
For the 30-year mortgage homebuyers are looking at a $237,695 purchase price ($222,695 loan plus the $15,000 down payment) and 30-years of interest payments totaling $137,305.02.
It is recommended here that instead of starting with the value of the home you want, start with the mortgage payment you can afford. This will help determine whether a 30-year or a 15-year mortgage gets you closer to the purchase price you need.
Let’s assume you’ve analyzed your finances and concluded a $1,500 monthly payment, $220,000 home and 15-year mortgage make the most sense for you, should you lock yourself into a 15-year mortgage or stretch it out to a 30-year?
15-year mortgage: over those 15 years the total interest paid would be $50,889.24 with a monthly payment of $1,500.
30-year mortgage: extra monthly payments of $516 ($1,500 in total each month) would end up with total interest of $66,848 over the course of the loan and would be paid off in just under 16 years.
This will give you the flexibility of a mandatory lower monthly payment of $984 in case a household member would lose a job for example.
(The difference in total interest and length, despite the same purchase price and payment of $1,500, is driven by the difference in interest rates for a 15- and 30-year mortgage).
For further help, visit Bankrate’s tool to calculate how much house you can buy. Link