You’ve planned and saved and now your hard work has paid off.
The major benefit to a 30-year mortgage is that you’ll have a lower monthly payment. A longer-term mortgage can make a more expensive home more affordable and can be an appealing option for first-time home buyers.
Let’s look as some numbers to determine the difference in monthly payment:
Based on a $150,000 mortgage at 80% loan-to-value (LTV), if the rate for a 30-year mortgage is 3.50%, your monthly payment (including principal and interest) would be $673.57.
But what would your monthly payment be for a 15-year mortgage? Shorter term loans generally have a better interest rate and can be a nice option for those who are retired or have accumulated more funds to make the higher monthly payment viable. Looking at financing that same $150,000 home at 80% LTV, if the rate for a 15-year mortgage is 2.75%, your monthly payment would be $1,017.93
That means you’re paying $344.36 less each month by opting for a 30-year mortgage.
We know monthly payments are lower with a 30-year mortgage, but how much more will you pay in interest? Going back to our $150,000 example, if you choose the 15-year option, you’ll end up paying $33,228 in total interest over the life of the loan. If you choose the 30-year option, you’ll end up paying $92,483 over the life of the loan. That means you’ll save $59,255 in interest by opting for a 15-year mortgage.
After you’ve paid off your 15-year mortgage, you could grow your savings by taking your payment of $1,017.94 and contributing it to a CD each month. If your CD had a rate of 1.42% that remained constant for 15 years, you’d end up earning an additional $20,475. Add that to the $59,255 you’ve already saved and that equals an extra $79,730!
As you can see, there are trade-offs with a 15-year or 30-year mortgage. If lower monthly payments are what you seek, then a 30-year mortgage is the way to go. But if you can afford the higher payments, a 15-year mortgage can be really rewarding and save you a significant amount of money in the long run.
How long you plan to stay in your home may affect your decision, and remember that even if you start off with a 30-year mortgage, you can always refinance to a 15-year if your financial situations changes.