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30 Year Vs. 15 Year Mortgages
Homeowners considering a mortgage refinance to lock in the current low rates or someone buying a home should compare 30 year and 15 year mortgages before just taking the traditional 30 year loan. With a 30 year mortgage, a homeowner will be paying off their home loan for many years and paying down the mortgage balance at a very slow rate.
A 15 year mortgage will pay off the home loan in half the time, but many don't have a payment twice as big as a 30 year mortgage. The homeowner who selects a 15 year loan can use the features of loan amortization to build up home equity quicker and pay less total interest to buy a home.
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30 Year Mortgage Advantages
The major advantage of a 30 year mortgage is lower payments when compared to the monthly payment of a 15 year mortgage. With mortgage rates at about 4.5 percent, the payment on the 30 year loan is about one-third less than the monthly loan payment for a 15 year mortgage. A smaller payment will be easier to handle for anyone's budget. For the homeowner who can afford the higher payment of a 15 year loan, extra principal payments can be made with the regularly scheduled payment to pay of the mortgage quicker. The homeowner with a 30 year loan has the flexibility to pay more and reduce the principal, or pay the scheduled payment and and use the extra money for other purposes.
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15 Year Mortgage Advantages
Paying a home off quicker using a 15 year mortgage results in a more rapid build up of equity through loan balance reduction and a significant decrease in total interest paid on the home loan. With the mortgage rates in effect for 2010, a homeowner with a 15 year mortgage will pay less than half the interest amount when compared to a 30 year loan, paid in full. Depending on the loan size, the interest savings can add up to hundreds of thousands of dollars.
A 15 year mortgage will usually have a lower interest rate than a 30 year mortgage taken out at the same time. In mid October 2010, Wells Fargo Bank was quoting a rate of 4.25 percent for a conforming 30 year loan and 3.75 percent on a conforming 15 year loan. The lower rate reduces the payment advantage of the 30 year mortgage and increases the interest savings for the shorter term loan.
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Comparing the Numbers
When you compare 30 year and 15 year mortgages, they can best be illustrated by looking at the payment and principal amount for a hypothetical mortgage. Say a loan has an initial balance of $250,000 and the prevailing rates for Wells Fargo listed above will be used as the interest rates.
For the 30 year mortgage, the monthly principal and interest payment will be $1,229.85. The total interest payment on the loan will be $192,746 once the loan is paid in full.
The 15 year loan will have a payment of $1,818.06 or $588.21 higher than with the 30 year loan. Total interest paid for the life of the loan would be $77,250, a savings of $115,496.
The loan balance on the 15 year loan will decrease at a faster rate, providing more equity if the homeowner should want to sell or refinance. Here are the loan balances after one and five years:
- 15 year loan: one year: $237,342, five years: $181,694.
- 30 year loan: one year: $245,785, five years: $227,019
The homeowner with the 15 year loan is almost $50,000 ahead after just 5 years.