Should you switch to a 15-year mortgage? It can be a great choice because of the money it can save you. One of the biggest benefits is the ability to quickly pay off your loan. It’s the perfect option if you’re planning to stay put for a while and you don’t want to pay off your mortgage over a long period of time.
The 30-year mortgage is pretty much an American archetype. Generations of first time homeowners have chosen to take that path. However, they could probably have been better served with a 15-year fixed-rate mortgage. A shorter-term loan means a higher monthly payment, which makes it look more expensive. But if you look at the numbers, the shorter term actually makes the loan cheaper in several ways.
Consider a $300,000 loan available at 4% for 30 years verse 3.25% for 15 years. The combinations of faster pay-off and lower interest rate means that the 15 year loan would cost just $79,441 compared to the $215,609 over 30 years.
That’s a lot of money but it’s also a higher monthly payment, which makes the difference for a lot of borrowers. The monthly payment on a 15-year loan will cost more than one that’s double in length for obvious reasons – you’re paying off more money in less time. But overall, the amount of money you will save makes it a real option to consider if you can afford it month-to-month.
15-year loans are less risky for banks because the money banks use to make shorter-term loans costs them less than the money used to make longer-term loans. The government supported agencies that fiancé most mortgages impose additional fees, called loan level price adjustments which make 30-year mortgages more expensive.
Going it alone
A 15-year mortgage isn’t the only way to pay you’re house off more quickly. Making additional principal payments can chip away at your balance without committing you to higher monthly payments.
Making an extra mortgage payment each year could reduce t a30-year loan to around 22 years. The most efficient way is paying 1/12 extra each month. For example by paying $975 each month on a $900 mortgage payment you will have paid the equivalent of an extra month payment by the end of the year.
Overpaying also offers a shorter path to an equity position so when you’re ready to sell you’ll have more equity in your home. You’ll also be a better buying position when/if you choose to move.
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