I hate surprises and predicting the future wasn’t my thing. But I did know, the rates on fixed mortgages were at an all time low and my motivation for buying a house is to dwell in it and not to flip or rent.
15 vs 30 Year Mortgages
That narrowed the choices to either a 15 year or a 30 year mortgage. The difference is very simple. You get to own your home sooner, pay less money overall with a 15 year mortgage vs having to pay more for a longer period of time with a 30 year fixed loan.
On the flip side, with a shorter term, your monthly payments are higher than with a longer term.
On the face of it, it makes perfect sense to choose the 15 year mortgage if you can afford the higher monthly payments without significantly denting your lifestyle.
Why wouldn’t you want to own a home sooner?
Also consider my temperament. I abhor debt of any kind, be it my car or my credit card. Except for my first car, I always paid upfront for my subsequent buys. I use credit cards, but don’t carry a balance.
Having lived debt-free, it would’ve made perfect sense to pay off the mortgage as soon as possible via a 15 year loan. But after careful consideration, I decided, I’ll choose a 30 year loan. Call me crazy, but hear me out.
Let’s start with the mortgage rates from the Wall Street Journal, as of today
As you can see, the current rate for a 30 year mortgage is 3.88% and the rate for a 15 year mortgage is 3.16%. We’ll be focussing on these two rates for this little experiment.
Assume the loan amount is for $200,000, no PMI. How much extra will I be paying if I were to choose a 30 year mortgage, but attempted to pay it off in 15 years at these interest rates?
15 Vs. 30 Year Fixed Mortgages
|Term||15 Years||30 Years With|
|Extra Monthly Payments Paid Bi-Weekly||$0||$500||$0|
|Monthly Payments |
(Principal + Interest)
|Total Interest Paid||$51,389.00||$61,273.69||$138,776.65|
|Payoff Date||Dec 2026||May 2026||Dec 2041|
Difference - 15 Years Fixed Vs. 30 Years Fixed But Paid Off In 15 Years
|Monthly Payments||Total Interest Paid||Total Payments||Payoff Date|
|15 Year Loan||$1,396.61||$51,389.00||$251,389.00||Dec 2026|
|30 Year Loan Paid Off In 15 Years, Bi-Weekly||$1,441.05||$61,273.69||$261,273.69||May 2026|
|Difference||$44.44||$9,884.69||$9,884.69||7 months earlier!|
Why is this awesome?
Let’s see, you pay off a 30 year loan as though this were a 15 year loan. Actually you pay it off 7 months earlier but you pay almost $10,000 more over the life of your loan than a 15 year mortgage. But this extra payment comes with one very important factor:
You now have the flexibility of adjusting your extra payments if you ever have a cash crunch or a job loss, which will not the case with a 15 year loan.
This very important flexibility is worth the little extra you’ll pay over 15 years. The alternative is frightening. If you can’t make your payments on a pure 15 year fixed loan due to a job loss or any other emergency, you risk losing your home.
What’s with the bi-weekly payments?
If you notice, I added this sleight-of-hand trick to the loan. Bi-weekly is making a payment every 2 weeks instead of once a month. On the face of it, doesn’t seem like this would make much of a difference. But you actually save $4589.04 by doing a Bi-weekly payment!
See a year has 52 weeks, which when divided by 4 (4 weeks in a month) gives 13, not 12. You are actually making one extra payment annually which over time, cuts your overall payments by $4589.04 in 15 years!
That’s the power of compounding. Small actions have an avalanche effect over time.
I’ll reiterate – by choosing to prepay a 30 year loan in 15 years, you will overpay by about $10K. But that’s the price you pay for the flexibility of adjusting your monthly payments. Say your car broke down or you had to replace your roof, you can pay just the minimum for that month and make up for it when you get a bonus or when your get your tax refund. I think this flexibility is good to have.
Another factor to consider if you are doing a refinance is to see if instead of paying closing costs, which is usually a percentage of the loan, if it is better to use that money to prepay your existing mortgage. Never rush into refinancing your home.
Mortgages, it’s always a numbers game!
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