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Free Money Finance

The Big Financial Advantages of a 15-Year Mortgage

Posted: 13 Sep 2016 02:05 AM PDT

Here's an interesting piece from Money magazine that reminds us of the advantages of a 15-year mortgage over a 30-year mortgage -- namely, the cost.

They list four reasons a 15-year mortgage is better but the main reason is point #1 -- it saves a TON of money!

Key quote:

Taking out a 15-year mortgage dramatically cuts your home-loan repayment time. The faster you repay the loan, the less in interest you need to pay. This can save you tens of thousands of dollars over the (shorter) life of your loan. A 15-year mortgage also usually offers better interest rates than other loan products.

Exactly how much money?

I went to Google, typed in "mortgage calculator" and they had an easy on-page calculator that covered the basics.

I then searched for current mortgage interest rates and got to Bankrate's list of mortgage rates

So let's assume:

  • $300k home
  • 20% down, so the buyer is borrowing $240k
  • Two loan options: 15-year fixed (2.87% interest) and 30-year fixed (3.56% interest)

The results:

  • 15-year mortgage has a monthly payment of $1,642 with total cost of $295,638
  • 30-year mortgage has a monthly payment of $1,086 with total cost of $390,874

In other words, you'd save $100k by using a 15-year mortgage versus a 30-year one.

But someone might object that they can't afford the house they want with a $1,642 per month payment.

That's correct -- they can't afford it. They should instead be looking at something they can afford.

There's a tried and true method for buying a house and paying off the mortgage in 10 years. One way to implement this is to get a house you can afford with a 15-year mortgage, put in extra payments, and have it done in a decade.

You'll save yourself $100k which you can then invest over the next 15 years (versus the 30-year mortgage people). This $6,667 per year invested at 8% is equal to $181k! So by choosing a 15-year mortgage over a 30-year mortgage, you're saving yourself/earning almost $200k!

Furthermore, if you let that $181k ride for the next 15 years at 8% it's worth $574k when you retire (if you're wondering, this assumes you buy the house at 25, pay it off at 40, save/invest the $181k by 55, and keep it invested until age 70).

So it seems to me that the 15-year mortgage is a clear winner. Thoughts?


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