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A mortgage term you can afford

You’ve planned and saved and now your hard work has paid off. You’re ready to start the exciting process of purchasing your new, or maybe even first, home! One of the first steps to making it a reality is meeting with your mortgage banker. There are several financing options, like whether you finance your home for 15 or 30 years. How do you decide? Let’s compare the options:


Monthly payments

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.

Interest savings

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.

Investment

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!

Decision time

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.

Ready to get started? Talk with one of our mortgage banking experts or start the online application process today!

 

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