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.
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.
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.
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.
- Yahoo Finance: Ask the Mortgage Professor: https://loan.yahoo.com/m/cq_30or15.html
- How To Calculate Monthly Home Payments