|
15 Year Mortgage will save you Thousands
The 15-year fixed-rate mortgage has proved popular with two very different groups of home buyers. First, it enables young home buyers with sufficient income to meet the higher monthly payments to pay off the house before their children start college. They own more of their home faster with this kind of mortgage. Other home buyers, more established in their careers, who have higher incomes and desire to own their homes before they retire, may also prefer this mortgage. The 15-year fixed-rate mortgage gives them additional financing options using the house's equity.
For example, they can easily take out a second mortgage if they want to make use of the equity in their home. But you need not fall into either category to appreciate the savings that the 15-year fixed-rate mortgage affords home buyers. Let's take a closer look at some of the pros and cons of this type of mortgage and what savings you may expect.
The 15-year fixed-rate mortgage offers the qualified consumer five big advantages
You own your home in half the time
it would take with a traditional mortgage.
You save more than half the amount
of interest of a 30-year mortgage. On a $75,000 mortgage
at 9.5 percent, you save more than $95,000.
Lenders usually offer this mortgage
at a slightly lower interest rate than with 30-year
loans--typically 0.5 percent to 1.0 percent lower.
It is this lower interest rate added to the shorter
loan life that realizes the savings for 15-year fixed-rate
borrowers.
Fixed-rate means exactly that - no
matter where mortgage interest rates go, the payments
for this mortgage stay the same from the first to
the last. This helps many borrowers plan their budgets
with more certainty. They know that their monthly
payments will not increase (or decrease) and throw
their financial planning off.
Fifteen-year mortgages can be insured
by the Federal Housing Administration (FHA) and the
Veterans Administration (VA), and by private mortgage
insurance companies.
- The monthly payments for this type
of loan are higher than those for a 30-year mortgage,
roughly 10 percent to 15 percent higher per month.
- Because borrowers pay less total interest
on the 15-year fixed-rate mortgage, they lose the
maximum mortgage interest tax deduction.
.
Compare Them Yourself
|
Below is a comparison of a $75,000 mortgage
with terms of 15 and 30 years. We used a 15-year mortgage
at a half percent lower rate, which is typical in today's
market. As you can see, the 15-year mortgage saves more
than $95,000 over the traditional 30-year loan.
| Term |
30 Years at 10% |
15 Years at 9.5% |
| Loan Amount |
$75,000 |
$75,000 |
Monthly Payment
(Principal & Interest) |
$658 |
$738 |
| 1st year Interest: |
$7,481 |
$7,023 |
| Principal Balance: |
$74,583 |
$72,625 |
| 4th Year Interest: |
$7,336 |
$6,244 |
| Principal Balance: |
$73,052 |
$63,991 |
| Total Interest Paid: |
$161,942 |
$65,970 |
Difference in Total Interest Paid:
$95,972
|
What Are the Pros and Cons of 30 and 15 Year Mortgages?
Consumers shopping for a mortgage typically think in terms of the interest rate and how that affects their monthly payment. The lower the rate, the better. However, even in today's low interest rate environment, borrowers are often shocked when they realize the total amount of money they'll pay in interest if they keep the mortgage until it matures.
Lenders are required by law to provide borrowers with a Federal Truth-In-Lending Disclosure Statement which includes, among other things, the amount of the "finance charge". The finance charge is the amount the loan will cost the consumer over the term of the loan (usually 30 or 15 years).
Suppose you borrow a $100,000, 30-year fixed-rate mortgage with a 7.5 percent interest rate. If you keep the loan for 30 years, your finance charge will be $151,712. You'll pay far more in interest than the amount you borrowed.
What is the best way to reduce finance charge
One way to reduce the finance charge is to get a mortgage that's due in 15 years. Lenders usually give a preferential rate to 15-year borrowers which might save you about .5 percent on the interest rate. But, far bigger savings are attainable simply because of the shorter loan term. For example, on a $100,000, 15-year fixed-rate mortgage at 7 percent, the finance charge is $61,789. Although this represents a substantial savings compared to a similar 30-year loan, does 15-year financing make sense for everyone?
One reason 30-year mortgages are popular is their relatively low monthly payments. The lower the monthly payment, the easier it is to qualify for the loan. Let's say you want to borrow $150,000. You're quoted 7 percent for a 30-year fixed-rate loan. The monthly payment (principal and interest only) will be $997.50. Compare this to the monthly payment on a $150,000, 15-year fixed-rate loan with a 6.50 interest rate. The monthly payment is $1306.50. Marginally qualified borrowers would have a difficult time qualifying for the higher monthly payment.
What is them the best way to save on my mortgage?
If you can afford the higher payments, you'll build equity faster with a 15-year mortgage than you will with a 30-year loan. This can work as an enforced savings plan. However, as your mortgage balance decreases so does your tax write-off. If your primary motivation is to get the biggest tax break possible, you may want a 30-year loan with interest only payments.
Your personal financial situation should dictate which loan is best for you
For example, if your future income is uncertain, a 30-year mortgage with lower monthly payments will give you more control over your finances. Lenders usually permit borrowers to make additional principal payments. When you have extra funds available you can apply this to your mortgage, but you're under no obligation to do so. If you're locked into a 15-year loan with higher monthly payments, you're obligated to pay this amount each month.
On the other hand, a 15-year mortgage might be an ideal choice for homeowners on a fixed income, who can qualify for the higher monthly payments and who want to own their home free and clear of debt in 15 years.
With a little discipline, thousands of dollars can be shaved off the finance charge. For example, if you were to make one extra mortgage payment a year, you could pay off a 30-year fixed-rate loan in about 20 years. That's 10 years of interest that you won't have to pay.
How much I will save a 15 or 30 year mortgage term?
15 year term saves you $139,530, but costs an additional $456 per month.A 15 year mortgage term will save you $139,530 in interest, but only if you can afford an additional $456 per month. Total payments for a $200,000, 15 year mortgage at 6.00% is $303,789. Total payments for the same loan with a 30 year mortgage at 6.25% is $443,319. | Mortgage Comparison | | | 15 year mortgage | 30 year mortgage | | Loan amount | $200,000 | $200,000 | | Interest rate | 6.00% | 6.25% | | Monthly payment | $1,687.71 | $1,231.43 | | Total interest | $103,789 | $243,319 | | Total payments | $303,789 | $443,319 |
|
Interest and Income TaxesChanging your mortgage term can make a difference in not only the interest you pay, but your income taxes. A longer mortgage term can increase your income tax deduction. Take a look at the results below, to see how the different terms stack up. | Interest and Income Tax Comparison | | | 15 year mortgage | 30 year mortgage | | First months interest | $1,000.00 | $1,041.67 | | First months principal | $687.71 | $189.76 | | First years interest | $11,769 | $12,434 | | First years tax savings | $2,942 | $3,108 | | Avg. years tax savings | $1,730 | $2,028 |
|
Reducing The Anxiety of Waiting
For many home buyers, the period of time
between submission of the loan application and approval
is one of uncertainty and concern. Requests for additional
information, unexpected delays and lack of communication
all serve to increase the tension. There are a number
of things both you and the lender can do to reduce the
stress.
Keep in mind the lender wants to make
the loan. Loan underwriters are looking for ways to
approve loans, not reject them. If you have come to
the interview with the loan officer fully prepared and
have provided good documentation, you have done a great
deal to assure prompt processing of your application
and approval of your loan.
You and the lender need to make sure
that lines of communication are kept open. Your contact
person may be the loan officer, but often it might be
someone in the lender's loan processing department who
can tell you the status of your application.
You should be accessible if the lender
needs additional information or documents during processing.
If you are from out of town, use your real estate agent
as a contact, if necessary. Quick response to lender
requests helps keep the process on schedule. In order
to protect both you and the lender, mortgage loans require
much more paperwork and legal documentation than an
automobile or other installment loan, and lenders do
not ask for more than is absolutely necessary.
Obtaining a mortgage loan need not be
an ordeal that dampens the thrill of acquiring a new
home. If you understand the lending process and are
prepared to do your part, it simply becomes a key step
in owning a home.
|
