15 year vs 30 Mortgage? Which should I pick?

by Mike Yeo on April 10, 2012

We know that currently, interest rate for mortgages are at the all time low. Many take this opportunity to buy their first home while others move up or down in their home. Those that stayed put might have refinanced their home for the lower interest rate.

Whatever the case maybe, people often ask should I get a 15 year or a 30 year mortgage?

Personally, I like the shorter term mortgage. You can even get a 10 year mortgage. Here are couple of reasons why shorter term is better:

1. You will pay it off for sure. If you give yourself a reason to take on a 30 year mortgage with the intent to pay if early by making extra payments, most of the time you will not pay off early. Life happens and you will be tempted to take that extra payment you have earmarked and used it for something else telling yourself we will make extra payment the next time. If you take on a 15 year mortgage, it will be paid off in 15 years or less if you make extra payment. If you don’t, it will still be paid off in 15 years.

2. You will pay less in interest for the shorter term mortgage. Lets look at the example below comparing between 15 year and 30 year mortgage. Assuming you purchased a $250,000 home with a 10% down and 6% interest rate. Your mortgage amount is at $225,000.

Monthly Payment Interest Paid
30 years $1,349 $485,636
15 years $1,899 $341,762
Difference $143,874

As you can see, with a 15 year mortgage, you would have paid $143,874 less in interest if you would have if you had a 30 year mortgage.

3. But…but….the monthly payment is higher for a 15 year loan! Yes, that is true. There is a reason for that. On a 15 year mortgage, you are making more paying to the principal which means you are paying down on the principal AND THAT MEANS YOU WILL HAVE MORE IN EQUITY.

If you made the payment above for a 15 year vs 30 mortgage, your equity at the end of 5 years will be:

Monthly Payment Equity Paid
30 years $1,349 $40,628
15 years $1,899 $78,980
Difference $38,352

As you can see, the differences is pretty significant. The equity here includes the $25,000 down payment and how much principal was paid in the 5 years.

The monthly payment on the 15 year mortgage is higher which means you will need to look at your budget to make sure it is not too tight. A home is suppose to be a blessing and not a burden. If the payment does not work with your budget, then hold off and save more for down payment. Borrow only on the 15 year term. This will definitely help you to have a peace of mind and help built your equity faster.

 


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