With a 30-year mortgage under current market conditions (4% interest rate), the monthly principal & interest payment on a $200,000 home after a 10% down payment is $907 a month. When added together, the amount paid over the 30 years would be: $338,400.
Now what about the 15-year mortgage? Though there will be more money paid back in less time (so the monthly payment will be higher), did you know, that typically a 15-year mortgage often carries a rate 0.75% lower than a 30-year mortgage?
That means with this same example, a 15-year mortgage under current market conditions (3.25% interest rate), the monthly payment on a $200,000 home after a 10% down payment is $1,335 a month. When added together, the amount paid over the 15 years would be: $240,300.
Though a $940 payment fits into most people’s budgets much easier than $1,335, the extra interest you pay on a longer-term mortgage is mind-boggling! In this scenario, you’ll pay nearly $100,000 more for the same home with a 30-year mortgage than you would with a 15-year mortgage. That's right, $100,000 more!
Clearly, a 30-year mortgage is a much more expensive over the long term than a 15-year mortgage. What could you do with an extra $100,000? Maybe multiple vacations, paying off other debt, padding your nest egg, or even paying college tuition for a child. The possibilities are endless. Now there are some additional scenarios that we will address in future posts (such as the present value of money, opportunity cost, implications with investment property, etc.) that also affect this decision, but we hope this opens a discussion of different ways to look at mortgages.