Often the biggest factor in real estate transactions that drives decisions is the mortgage. Buyers typically need a mortgage as few have the amount of cash available to make such a large purchase. The mortgage process can be confusing. Borrowers need to be approved and should try to obtain the lowest possible interest rate based on their creditworthiness. Also, there is the decision of the length of the mortgage. Traditionally this decision options are a 30-year term or a 15-year term. A typical response is, “I’ll get a 30-year and pay it like a 15.” This decision alone can cost many thousands of dollars.
When you’re planning to buy a home with a mortgage, it’s natural to focus on how much your monthly payment will be. After all, a good rule of thumb is to keep your payment at 25% or less of your monthly take-home pay. However, don’t overlook the long term impacts this decision can have on your finances. Take a look at the following example.
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.
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.