Acquiring a 15-year mortgage, as compared to the traditional 30-year variety, has both benefits and challenges. Take this imaginary $100,000 loan as an example:
For the 30-year loan, we’ll assume a rate of 5.00 percent; the monthly payment, excluding taxes and insurance would be $536.82. Because the rates for 15-year mortgages are typically lower, we’ll use 4.75 percent as a rate. This gives us a monthly payment of $777.83 – a difference of $240.91 per month.
While this is no small difference on a monthly basis, it’s a big difference over the long term. The total amount you will pay for the 15-year loan is ($777.83 x 180 months), or $140,009.40. The 30-year mortgage, however, will set you back ($536.82 x 360 months) $193,255.20. This is a difference of $53,245.80, or over half of your original loan amount.
If you are unable to afford the 15-year payment each month, but would like to reduce the mortgage balance more quickly, you can always get the 30-year loan, and make the equivalent of one extra payment per year.
In this scenario, you could add one-twelfth of your payment ($44.74 per month) to $536.82, and shave off almost seven years from the end of the loan.
Despite the slightly higher payment, the advantage of this solution is that if one month your financial situation is especially tight, you could make the regular payment, then catch up the following month.
Discuss your options with me and I will help you pick the term that’s best for you.