30 Year Mortgage VS 15 Year Mortgage
When it comes to mortgages there are lots of different loan options. Conventional loan, FHA, USDA, VA, etc. In this blog we are going to be going over the differences between loan length terms. There are pros and cons of each and it's important to know the differences, as they can cost you hundreds of thousands of dollars.
According to Freddie Mac 90% of mortgages are 30 year loans. There are a few reasons for this and for most this is going to be the option they go with. It's important to know the differences though and I find that most lenders don't explain this very well.
. All Numbers Based On $350,000 Home Loan
30 Year Mortgage VS 15 Year Mortgage
Monthly Payment
30 Year - The primary reason 90% of all mortgages are 30 year loans is because of the monthly amount. Obviously the loan amount divided over 30 years is going to be cheaper than if it were divided over 15 years.
15 Year - A lot of people have the impression that because your loan terms are cut in half on a 15 year loan that your monthly payment doubles. That's not the case at all and depending on what the interest rate is there could be a very little difference. Right now, with current rates at 7%, there's about a $700 difference on a $350,000 house, but back when rates were in the 3's there was only about a $200 difference. Coming up with an extra $200 a month to save 15 years on a loan isn't too difficult, but $700 can be hard.
WINNER: 30 YEAR - $2,337.97 compared to $3,037.34
Mortgage Interest Rate
30 Year - Today's (10/28/2022) current 30 Year Fixed Rate is 7.02%
15 Year - As of today it's 6.44%. The 15 Year Fixed Rate is typically a half a percent to a full percent lower than the 30 year fixed. This is another reason why, depending on the rate, the 15 year loan isn't much more than a 30 year when it comes to the monthly payment.
WINNER: 15 YEAR - 6.44% compared to 7.02%
Interest Paid
30 Year - The chart below on the left shows the percentage of interest vs the percentage of principal paid. The one on the left is a 30 year loan and the right is the 15 year. As you can see on a 30 year loan you are paying 58% interest and 42% towards the principal.
15 Year - On a 15 year loan you are paying much less interest than on a 30 year loan. 64% goes towards your principal and only 36% going towards interest on your loan.
WINNER: 15 YEAR - As you can see in the chart below on a 30 year mortgage you are paying nearly $300,000 more in interest than on a 15 year loan.
Tipping Point
30 Year - The tipping point is the point in a mortgage when the principal paid starts outweighing the interest paid. Below I have circled when that starts happening. On a 30 year loan it takes 21 years before you start paying more principal than interest. 21 years!
15 Year - On a 15 year loan your principal paid proceeds interest paid in just 5 years.
WINNER: 15 YEAR - Clearly the winner here is the 15 year. 5 years compared to 21 is a huge difference.
Conclusion
The 15 year loan is by far the better option for you when it comes to getting a mortgage. However this isn't always feasible for everyone and a 30 year mortgage is going to fit better into most peoples budgets. The way the economy is going and the way it looks like it's going to go for a while to come, a 30 year mortgage is probably the safer option. The good new is there are still ways to save years and interest off your mortgage.
30 Year Loan
Take out a 30 year loan, but make the 15 year loan payments. If you can afford the 15 year payments this is a great option as you are only committed to paying the 30 year monthly amount. That way if you get in a tight spot and can no longer afford the 15 year monthly amount you can just make the 30 year monthly payment.
Make one extra payment per year
The easiest way to do this is just dividing your payment by 1/12 and just adding that amount each month. By doing this you will save 6 years off your mortgage and a lot of interest.
$1 More A Month
The dollar-a-month strategy should be financially feasible if your income increases slightly but consistently over time.
Each month, increase your payment by $1. Simply pay $900 the first month, $901 the second month, and so on. For a 30-year, $900-per-month mortgage with a 6% fixed interest rate on a loan of $150,000, you could reduce the term of your mortgage by eight years.