15 or 20 or 30 Year Fixed – Which Mortgage is Right for You?
While most mortgage lenders and borrowers focus on the omnipresent 30 year fixed rate mortgage, other mortgage terms do exist. Many of them offer lower interest rates in addition to the added benefit of paying off your loan quicker.
So, is the 30 year mortgage always the right choice? Are there drawbacks to choosing the status quo? I’ll let you decide.
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30-Year Mortgages Drawbacks
When it comes down it, 30-year mortgages have some drawbacks, with the most obvious one being the long amortization period. They also come with the highest interest rates relative to other loan programs.
If you review your loan documents and disclosures you’ll see a “Loan Estimate” with an eye-opening number – the amount you’ll pay over 30 years including the interest.
The total paid will often be as high as double what you actually borrowed. Why is that? It’s all in the amortization.
Mortgages are amortized in a way where the first few years of the loan you put very little toward the principal balance. Slowly, as the loan term progresses the amount you put toward interest decreases and the amount applied to principal increases.
The obvious applies, when you pay a mortgage off more slowly you will pay more interest. Basic common sense. You’ll clearly have a lower monthly mortgage output too, but is that difference enough to make it a financially sound decision? Let’s look at the numbers and you can decide.
Our numbers will be based on the following assumptions:
- $350,000 loan amount
- Excellent credit (above 740)
- 20% down payment
- Interest paid numbers assume you keep the loan for the term
- Hypothetical interest rates
- Payments do NOT include property taxes or insurance
On a 30 year fixed rate mortgage with a 4% interest rate you’ll have the following:
- Monthly Payment – $1,671
- Total Interest Paid – $251,543
On a 20 year fixed rate term at a 3.75% interest rate you’ll have these numbers:
- Monthly Payment – $2,075
- Total Interest Paid – $148,025
On a 15 year fixed rate at 3.25% interest you’ll have these outlays:
- Monthly Payment – $2,459
- Total Interest Paid – $92,681
So, see anything in these numbers? I do, some of these numbers practically leap of the page, especially the difference in interest paid.
The 20 year mortgage nets you $103,518 in interest savings. The 15 year yields even more coming in at $158,862 in mortgage interest savings.
Significant numbers. Numbers that should certainly be weighed when on your next mortgage transaction.
I know some contrarians are reading this and saying – the mortgage interest is a tax write-off. That would be correct, but the amount of the tax savings is minimal in comparison to the interest savings over the life of the loan.
Regardless of what you go with – the cheaper payment or the interest savings – you deserve to see the comparison on paper so that you can make the right choice.
Ask your loan officer to provide a custom comparison between available loan term lengths and interest rates next time you shop. You never know, a reduced term might just be the mortgage you choose.
Everyone’s financial situation is unique. Thankfully, there are unique mortgage products and terms, whether you know about them or not, that may be a better match than the plain old vanilla 30 year fixed.
It’s up to you to explore them.
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